A Tribute to the Thoughts of Another and his Friend"Everyone knows where we have been. Let's see where we are going!" -Another

Wednesday, January 16, 2013

Legs

From the comments under the last post, it seems that a few of you don't understand what I do. But that's OK with me. I don't need to be understood.

I think someone wrote "I'm not convinced." Ha! Good, I hope not for your own sake! That doesn't mean that I think my post was wrong, just that if you feel that way strongly enough to post a comment about your own state of mind then you might want to check your expectations at the door. ;D

I can also tell from the amount of support that came in through email and Paypal that a lot of you do understand what I do and, more importantly, that you appreciated the significance of what I did in those three posts. But for the rest of you, I'll post this again and keep posting it as often as it is needed:

FOA: "I (we) expect none of you to consider anything said here as credible. Everything is given as I understand it. If you came with a notion that I am someone who sees the future, grab the children and run far away. For these Thoughts, and my ongoing commentary, are meant to impact exactly as the "gentleman" said they would. People hear them, and whether believed or not, the words leave a mark. A mental mark on the trail, if you will. And later, after the world turns, our little "stacks of rocks" will be easier to understand next time you are passing this way. In fact, your ability to find your own way will forever be enhanced for having seen this path in a different light."

For the benefit of those who are still lugging around their preconceived notions, allow me to briefly clarify a few things. I do not know anything special. I do not do technical analysis. I do not provide any tradable information. I do not have any inside knowledge. I am not FOA. All I do is unwind the trail that he exposed a long time ago and then share my understanding with you for free. What you do with it after that is up to you. I do not give unsolicited advice nor do I put my opinions "out there" beyond the confines of my own space. If you are reading what I wrote, then you must have come to me, because I didn't approach you. So if you don't like what I do, then by all means please find something more useful to do with your time.

"Official Support" – Then and Now

There were also some great comments under the last post and a few good questions. I'd like to take a closer look at one of them in this post and, hopefully, kick off an interesting discussion. Max De Niro asked:

"How is that the ECB supports the paper gold market? Do they buy COMEX contracts, LBMA unallocated? Where would this show up on their balance sheet?"

Along the same lines, Tintin wrote:

"A quetion about possible ECB support for the paper gold market, or the withdraw of such: How do they do it? […] So you see, I am struggling with ECB support = higher POG or withdraw of ECB support = lower POG."

These good questions highlight an issue that I think is worthy of further discussion. So let's take a closer look at it.

I'm expecting a lower POG simply from the force of "gravity". In the post I proposed two legs of support for the paper gold market: 1.) the bull market in paper gold (private support), and 2.) official (CB) support. I said that "support" does not always mean a higher price (in the early- to mid-90s it did not), but that today, price levitation does reveal support coming from one (or both) of the two legs.

So the withdrawal of ECB support would simply let the "paper gold bull market" (private support) battle it out with gravity. It does not mean an immediate free fall in the POG (I presume "official support" is only occasional), but it means that if something goes wrong, like a general market decline, there might not be the "emergency support" that there was last time.

Think of it as two separate markets, physical gold and paper gold, which are presently attached to each other. Imagine that the physical gold market is like a beach ball being held underwater and that the paper gold market is like a lead weight also being held underwater. "Support" is simply whatever keeps them attached to each other. Most people think they are inseparable, just like most people think the dollar can't hyperinflate. In both cases it is "support" that is forestalling the inevitable.

Back in the 90s ANOTHER told us that when a CB sells gold, it is to a specific buyer, off market so as not to influence the price, but when a CB leases gold it is for a purpose, to buy "something" for the market. So what is the difference between a gold sale and a gold lease? I think the distinction is worth a closer look.

For one thing, if you want to buy some amount of spot or physical gold, normally you must have already accumulated surplus currency equal to the amount of gold that you want to buy (e.g., a Giant or just an everyday saver). Not so for a lease. To lease that same amount of gold you only need a business plan or an outlook that will yield more than the interest on the loan (e.g., a bullion bank, a mining company, a hedge fund or a gold fabricator). A lease is a two-legged deal. In essence, a lease is simultaneous spot and future transactions in opposite directions.

A CB that is leasing gold is taking a position that is essentially short spot gold and long future gold. Spot gold may occasionally mean physical, but not necessarily. This position "supports" the market (keeps the two markets attached) at times when the private market is running in the opposite direction—long spot gold and short future gold. This "running in the opposite direction" occasionally leads to the backwardation seen on the lease rate or GOFO charts because future gold loses its contango (its premium) over the spot gold price. It is similar to OBA's "rush to the Here 'n Now."

Now let's think about spot gold that is not physical gold. If it's not physical, then what is it? It is simply a non-interest bearing account denominated in gold ounces (or XAU) rather than dollars (USD) or euros (EUR). The equivalent of an interest bearing account in gold would be a lease, as long as the market is in contango. In other words, if you want to earn interest on your gold, you lend it out. You sell your spot gold, buy future gold at a slight premium (but you only have to pay a small deposit to lock in your future price), and then you use the rest of the proceeds from your sale to earn your interest in dollars from money markets or Treasuries.

The point is that interest comes from currency, not gold. Gold doesn't reproduce itself, it just sits there. You can't buy spot gold and come back a year later to find more gold. But Treasuries do, somehow, reproduce dollars. You can put in $X and come back a year later to find $X+n dollars waiting for you. To make money from gold you must sell it, buy it back later, and make money lending the currency during the time in between. Spot gold (XAU) accounts are the same. If you want to make money you must sell your spot gold (even if it's just a book entry) and buy it back at the future's price, earning interest with your currency in between.

Another way to look at the difference between borrowing and purchasing gold is that it only makes sense to borrow gold if you think the price is heading lower (or at least flatter than interest rates). If you borrow gold, you profit when the price falls. Buying gold, on the other hand, makes sense either A) if you think the price is heading higher (Western/shrimp view) or B) if you view gold as real wealth (Eastern/Giant view).

According to a World Gold Council (WGC) research paper back in 2000, the mining industry was the greatest user of lent gold, and central banks were by far the largest lender. According to the survey conducted for the paper, 90% of the gold on loan came from central banks. [1]

The mining industry was essentially borrowing XAU (spot gold) credits and paying them off with physical down the road. But they couldn't spend XAU—what they really wanted and needed was dollars. So the bullion bank would assist the miner in selling his borrowed "spot (paper) gold" into the "gold" market and the producer would get the dollars he needed and could later pay them off with a pre-determined weight of physical no matter which way the price went in the meantime. And back then, the price was often falling, sometimes below mining costs. So this was a good deal for the miners.

There's also another way to think about these two-legged deals. It could also be said that the miner was simply forward selling his future gold production for a cash flow of dollars in the present, locking in a good sales price in the process. The counterparty to this deal, the bullion bank, would then be long future gold and, to offset this long position, would short sell spot gold, borrowing it from the CB and selling it to the market. Here's what another WGC research paper, this one from 2001, said about it:

"Transactions in the derivatives market, whether they are motivated by the need to hedge future production, or to hedge the risk of holding gold in inventory, or simply by speculation, tend to be seller initiated. The other party to the transaction – typically a commercial bank or some other intermediary – will seek to hedge its exposure to the gold price by selling in the spot market (normally borrowed gold). The sale of gold in the forward market therefore generally leads to a sale in the spot market.

When the derivative contract matures, the spot market hedge is removed, and the bank buys back the gold. Thus the effect of hedging by producers and fabricators is to bring forward or accelerate sales in the spot market. The volume of sales brought forward is equal to the net short position of hedgers and speculators.

So long as the net short position is stable, with the initiation of new contracts being offset by the maturing of old contracts, the effect on the spot market is neutral. But over the decade of the 1990s the amount of hedging increased rapidly, with much of the increase occurring in the second half of the period. The net short position increased by a total of some 4,000 tonnes, or around 400 tonnes/ year on average. To put the point another way, to meet the demands of the derivative markets, holders of gold increased their lending of gold to the market by some 4,000 tonnes." [2]

Now let's take a look at what ANOTHER wrote about it.

Date: Fri Nov 28 1997 23:29 ANOTHER (THOUGHTS!) ID#60253:

The BIS set up a plan where gold would be slowly brought down to production price. To do this required some oil states to take the long side of much leased/forward gold deals even as they "bid for physical under a falling market". Using a small amount of in ground oil as backing they could hold huge positions without being visible. For a long time they were the only ones holding much of this paper.

Date: Sun Nov 16 1997 10:20 ANOTHER (THOUGHTS!) ID#60253:

It is not only important to understand this question, but also to ask it in context!

Date: Sat Nov 15 1997 20:14 Crunch ( Question for Another ) ID#344290:
Another, a question, please: When gold is borrowed from CBs, what collateral is required by the CB to be assured the loan will be repaid in full?

Crunch,
If you will allow, I will add to your thinking. In todays time the CBs do not sell physical gold with a purpose to drive the price down. They sell to cover open orders to buy what cannot be filled from existing stocks. Look to the US treasury sales in the late 70s. They sold 1 million a month using open bid proposals with much fanfare. If the CBs wanted physical sales to drive the price they would sell in the same way.

The sales today are done quietly with purpose. The gold must go to the correct location. That is why these sales do not impact price as they occur, there is a waiting buyer on the other side. As all of these transactions are done thru certain merchant banks, not direct CB contact, the buy side does hold hedges.

When actual delivery takes place, months later ( and usually at the same time as the CB sale statement ) these hedges come off and affect the market price.

[…]

[Central] Banks do lend gold with a reason to control price. If gold rises above its commodity price it loses value in discount trade. They admit now to lending much where they would admit nothing before! They do this now because of the trouble ahead. Does a CB have collateral to lend its gold? Understand, they only lend their good name on paper, not the gold itself. The gold that is put on the market in these deals belongs to someone else! The question is not "Are the CBs worried for the return of gold?" but, "Has our paper been lent to the wrong people?".

Date: Wed Nov 12 1997 14:08 ANOTHER (THOUGHTS!) ID#60253:

All CBs will now slowly stop all leasing operations and allow the market to size itself. The important players, the oil states, will have their paper covered without question! But, for all others, the great scramble is about to begin!

With this statement, ANOTHER explained the implication of a recent Bundesbank statement following a BIS meeting that would materialize two years later as the Central Bank Gold Agreement (CBGA), which read: "4. The signatories to this agreement have agreed not to expand their gold leasings and their use of gold futures and options over this period."

Date: Sat Nov 29 1997 15:53 ANOTHER (THOUGHTS!) ID#60253:

Something interesting happened just ago that will, in time impact the price of gold in US$. A proposal was offered to borrow in broken lots, 3.5 and 5.5 million ozs for resale. It was turned down. The owner offered to sell only, no lease. What turned heads was that someone else stepped in and took it all, at a premium!

Date: Fri Dec 12 1997 21:06 ANOTHER (THOUGHTS!) ID#60253:

The paper gold market controlled by the BIS/LBMA system is, alone equal to more than all the gold in existence. This market works like a hybrid currency using approximately twenty to forty percent of all CB gold in leased form as backing. The paper behind the lease is a form of CB/gold and is used as a "fractional reserve" that has built this huge market. This system has worked and does work well. You have but to look at the good value that is received when dollar debt ( digital currency ) is purchased with oil. The world works! But this system cannot continue. There is a limit to how far gold can be inflated in quantity using "fractional reserve leasing" as backing. The fatal flaw was found in the "forward sales" of unmined gold. The whole system counted on the expansion of cheap mining techniques to supply much more gold at a cheaper price far into the future. This happened to a degree for a few years but then just leveled off.

Now the LBMA continues to flood the market with paper gold as if nothing has changed! But it has, we reached production cost! That wasn't supposed to happen until the mining industry had raised supply many times what it is today.

[…]

Will the BIS try to settle this unbalanced market by destroying LBMA? Or will they drive the CBs to lease another 20% in an effort to inflate this "paper gold currency". Just like the fiat dollar, if inflated it loses value. This is not lost to the oil states.

Here's what the WGC survey found two years later, immediately following the Washington Agreement (CBGA):

"On average, the official sector lends 14% of its declared gold holdings. However the proportion varies substantially from country to country. If the USA, Japan, IMF and major European countries that do not lend are excluded the proportion rises to 25%.

[…]

The mining industry is thus the greatest user of lent gold. Short speculative positions exist but appear to be of lesser size.

[…]

Hedging has enabled producers to realise higher than spot prices in recent years. However the mining industry is facing a number of derivative-related challenges:

- the total costs of marginal producers in North America and Australia are not being fully covered by average realised hedge prices. South African producers are faring better but their position may not be sustainable in the longer term;

- the Washington Agreement has precipitated a review of hedging practices by both mining companies and bullion banks. Well publicised difficulties with two hedge books have prompted a swing away from the more complex products. However since the more complex products have facilitated the achievement of higher realised prices, this could render hedging more expensive;

- the majority of producers have not been subject to margin calls on their hedging agreements. However the events of September 1999 have caused bullion banks to review the issue with the possibility that additional hedging premiums may be levied on mining companies that are deemed less creditworthy;

- the sharp decline in exploration expenditure implies that the reserve base is not being replenished. This has implications for existing credit lines and the ability to hedge reserves in the ground;

- the introduction of the FAS133 accounting system will also influence the choice of hedging products in the future.

• The bullion-banking industry has been subject to extensive restructuring in recent years. This has had a substantial effect on available credit. Banks’ trading limits have declined in recent years and are currently collectively likely to total some 2.5-3.5m oz (75 to 110 tonnes) of combined short-term net exposure.

• No evidence was found of any collusive behaviour on the part of market participants to manipulate the price." [1]

Date: Fri Mar 20 1998 22:12 ANOTHER (THOUGHTS!) ID#60253:

I hope all persons could see the "new" true nature of the Central Banks this week. I call it "The change that did happen"! If you read the post of Sat. Mar 07 1998 13:08 Another, that was written for me, it speaks of it all. The [central] banks do want gold to rise now, and they will pull in physical gold to replace leases, even if they must "pay high on the market". They do not rollover these loans now.

Here's the post that ANOTHER said someone else wrote for him:

Date: Sat Mar 07 1998 13:08 ANOTHER (THOUGHTS!) ID#60253:

The Management of Gold, A Simple Tool for the 90s

For any currency to maintain a "reserve" status, it must be, in some fashion, convertible into gold! In the past, the US$ was freely exchanged for a "fixed" amount of gold. $20 dollars was equal to one ounce. If the country wanted to make its money stronger, it would lower the amount of currency units fixed to one ounce. $10 dollars per ounce made the currency more valuable in the market and it would buy more things. Also, a country could decrease the value of its currency by raising the number of units to the ounce of gold, say $40. The problem with the "fixed" gold system is found in matching the amount of gold in the treasury to the "fix"! To make the money stronger, one had to bring in gold, as it took twice as many ounces to back a currency "in circulation" at $10 as it did at $20! The reverse is true when lowering the money value to $40. Then, one half the treasury gold backing had to be removed as only half was now needed to back the dollar.

You have probably not read this "slant" on the past gold standard because it was never quoted in quite that way, nor looked at in that fashion. If you allow your mind to perceive the above, one will clearly see that it was gold that gave the currency value. In that time one did not look to see how many dollars gold was valued with, rather, how much gold was bid for each unit in circulation!

Today, the world reserve currency is not on a "fixed" gold standard, it is on a "freely convertible" gold standard. One may, anywhere in the world, convert US$s into gold. This new "freely convertible" standard does still allow the dollar to be backed by gold for those who still demand a gold "fixing". That requirement is enforced by a certain commodity, oil. Yet, there is a price for the benefit of having all oil sales settled in US$. Yes, even in this modern era, for the US$ to remain on an "oil standard" it must be on some form of "gold standard"! Regain the perception in the top paragraph. Then understand that for oil to back the dollar, the dollar must find value in gold. And the dollar finds more value if it is fixed by the "freely convertible" gold standard, to buy more gold!

This convertible gold market is old from the mid 70s but is new from the early 90s. It is old by the 70s because it is "freely convertible", but it is new by the 90s as it "is not" "freely tradable"! The US$ price of physical gold is no longer "fixed" from supply and demand, rather it is "created" through the market action of "paper gold". Truly, it is the US$ has become the "item traded" in the "paper gold" market, not physical gold. Participants have yet to realize that the gold futures, gold options and gold forward markets, worldwide, have become little more than currency trading arenas. The percentage of gold delivered against these markets has grown so small as to be nonexistence when compared to actual metal settled at closing. Physical gold does still move, and in size, but this is little or nothing compared to the "paper gold" traded.

We are brought to this point for a purpose, but how did we get here? The largest producers of gold were introduced to the use of large scale "forward contracts" by the Bullion Banks. Once the process started, good business required it to expand. Shareholders want maximum profits at all price levels and "forward deals" were good at any price of gold. Once hooked on "hedge profits" during the good times of a high gold price, the mines now "must have at all cost" "forward deals", just to survive. Some say the mines will not forward sell at these, break even prices. However, the shareholders say it's better to hedge now, for a lower price will bring doom! With the US$ price of gold holding at just above average break even levels, and the ensuing virtual bankruptcy of several well known companies, it appears that the mine owners are correct.

Understand, that many entities lend gold, but it is the CBs that started and do most of it. Their purpose was to create a "paper gold" market that would allow them to manage the "freely convertible" price of gold. The CB lends the gold to a bank that sells it on the open market. ( Usually, the gold is placed privately as it must go to the correct destination. ) Then the bank holds the money and draws interest as incremental payments are made to the mine for new gold delivered against the contract. Over the long period that a mine takes to produce and repay the gold, this money grows. To grasp the fact that the CBs had a plan, is to know that they lend the gold for only 1% or 2% while the proceeds set in a Bullion Bank and grow with interest for the benefit of the BB and the mine! And further, the lenders allow the return of the gold to be extended out for many years, as in "spot deferred". The CBs allow public opinion to think of this as "typical government stupid", it's not!

Now that the gold price in US$ is around production cost, most mines must use "paper gold" to survive. The gold industry is coming under [central] bank domination, without signing away any sovereignty! Slowly, the CBs are gaining the ability to manage production and price with this simple tool.

"If they want new mine supply on the market, they roll over the contract to the BB. If they want new supply off the market, they allow the BB to pay for and take delivery of the gold and return it to the CB vault." "Also, by offering ( or withholding ) vault gold from lease, they affect the lease rate and thereby control private lending as well"

Understand that the second sentence action is used because gold lending is done by many different entities. Many times a mine isn't even involved. Sometimes, gold isn't even involved, just paper. But, it's still based on the gold price! The paper price, that is.

Mr. Mozel,
This world of money, it is a fierce one! I ask all, does anyone know a money manager with money for loan at 2%? No? Does not even the bank of Canada sell gold outright and receive "high" interest on cash? Is a CB that sells/leases gold dumb? NEVER!

If they sell gold, a way is clear to "bring gold back" for the nation! Canada has local mines, Australia has local mines, Belgium has South African mines! If they lease gold, it is for a purpose to buy "something" for the new supply to the market! The interest on the loan is for public view, as a "free gold loan" is not acceptable!

It truly started with Barrick, in Canada in the 80s. It was a "thin market", but grew big in oil. I think "intentional mistake" that was, as is said, "trial balloon"?

Thank You

8/10/98 Friend of ANOTHER

The Euro has, in effect already been dispersed in the form of Gold Leases not gold sales. One has only to look at the official gold holdings of most central banks to see that physical gold sales are little more than the average, with a good amount of that coming from nonEuro countries. Gold is a funny thing, it can be sold many times and pass through many countries and still remain in a CB vault. Truth Be told, some 14,000 metric/ton have been sold this way. Far more than the street thinks. Using this amount it's easy to see how certain entities have moved off the dollar standard in the last few years. If we use a future price of $6,000+US, the move is about complete.

The process: An oil country (or others) goes to London and purchases one tonne of gold from a Bullion Bank. The BB borrowed this gold from the CB (leased). The one tonne gold certificate is transferred to the new owner. The gold stays in the CB vault and the owner goes home. The CB leased this gold to the BB and expects it to be returned plus interest. The BB financed the Actual Purchase of this gold mortgaging assets of the buyer. The BB, who created the loan, then uses the cash arranged in this venture to contract with a mining company (or anyone wanting a gold/cross financing deal) to purchase production gold, using this cash to pay for it. In the eyes of the mining company, the BB just sold gold on the open market, for cash, and will purchase future production at the contracted price. The mine does not know where the gold came from, only that it was sold and a fixed cash price is waiting. Of course, most of this made more sense when gold was higher. There were thousands of these deals, structured in every possible fashion. Look to the volume on LBMA and you see where the future reserve currency is traded today!

9/3/98 Friend of ANOTHER

Poland and China are good customers for the BIS. This is real physical gold they are taking out of circulation, not the pay me back when you have a chance lease deals. They really do have the IMF/Dollar countries over the barrel. Under these conditions it's easy for them to drain the Canadian gold reserves. Soon, these goldless countries will be left with nothing but high yield US dollar treasury notes.

[…]

My understanding is that whatever collateral was freed up from the USSR , the BIS picked up for others. It left the brokers selling leases for almost nothing or 1/2% or so. No one was buying them so the rate just fell on no volume. This was a lucky move for them as the perception was that massive sales were taking place. I don't think the BIS wants to be seen as a currency destroyer so they are doing the buying quietly.

8/19/98 ANOTHER (THOUGHTS!)

I think, now it comes time to sell the dollar. As the Belgian gold was purchased to replace dollars, it did announced the end of EMCB leases. Now the BIS transactions do create a gold market that is "not as before"!

We watch this new gold market together, yes?

Thank You

Another

Then and Now – Two very different paper gold eras

Before we move on to 2001 and beyond (i.e., this), let's recap the 90s. From the beginning of the 90s until that last comment by ANOTHER, about nine long years, the $PoG declined from $400 to $280. To put that into perspective, it would be like gold falling from today's price down to $1,150 by 2022. In terms of the long timeframe and the absolute price decline, that would be pretty discouraging for Western goldbugs, wouldn't it? Yet this discouraging era didn't faze those in the East who already knew physical gold as tradable wealth in the least.

What we have here are two very different eras in the "gold" market. The turning point may appear to be 2001 (if we simply look at the gold chart), or the CBGA in late 1999, but the turning point was actually January 1, 1999 with the successful launch of the euro. And from the excerpts above we get a clear picture of the "official support" which helped keep the physical gold market of the East attached (or fixed) to the paper gold market of the West during an era of a declining price.

Official (CB) gold sales were all done off-market so as not to affect the price. (The BOE "Brown's Bottom" auctions were different, but they were also after the launch of the euro.) In fact, we will never know the price or details of these official sales. All we know is that ANOTHER said that physical gold did continue to move "in size" during this era. He even mentioned one CB-sized sale that, presumably, was not by a CB because of the way he told the story.

Someone had 280 tonnes for sale in 1997. Someone else, presumably a bullion bank, offered to lease that gold from the owner in two lots of 110t and 170t, but the owner wasn't interested in a lease. He only wanted to sell. And the interesting part of the story is that when he insisted on selling, "someone" (presumably a proxy for the BIS or a buyer arranged by the BIS) stepped in and bought the whole lot "at a premium" (presumably to keep the sale "off market").

So here we can imagine CBs both buying and selling "at a premium" in order to keep physical gold "in size" moving to wherever it needed to go without affecting the paper gold market price. What was the premium? I can only imagine it was a bit different for the guy dumping 280 tonnes than it was for someone seeking to buy a similar amount. And ANOTHER did give us a hint at the latter.

Leasing was a different story. Most of the leased gold came from official sources, and that did not include the US, the IMF or Japan. The CBs participating in this leasing practice during the 90s lent between 14% and 25% of their reserves per the WGC, and between 20% and 40% according to ANOTHER. CB lending grew from about 900 tonnes in 1990 to at least 4,710 tonnes in 1999 (other estimates take it as high as 7,000 tonnes). The CBs finally admitted to this practice and then a couple of years later announced that it would be curtailed.

The standard explanation for CB gold leasing is that the CBs wanted to earn some interest on an idle asset. ANOTHER said that this explanation was nonsense. He said it didn't even make logical sense unless you thought central bankers were dumb. He said they were not dumb, that they had a plan and a good reason for leasing gold. He also said that the low lease rate was merely for "public view" because "a free gold loan would not be acceptable." The WGC and the MSM all bought the "CBs want to earn interest on their idle asset" story. I guess you can decide for yourself if it makes more sense than ANOTHER's explanation.

That was Then, This is Now

In the 1990s, the supply of leased gold came mostly (~90%) from the CBs. The majority of the demand for this leased gold came from gold mine hedging operations (~60%). Another small portion of the demand (~8%) came from hedge fund short selling. As I said above, both of these "uses" for borrowed gold made sense while the price was falling. They don't make much sense in an era where the price is rising like it has been since 2001.

So, of course, as you would expect, the mining operations have closed out most of their hedge books that were carried over from the 90s. Also, the CBs announced that they had agreed as a group not to expand their gold leasing operations beyond 1999. And any hedge funds that have been shorting gold for the last decade have surely gone out of business. So, most of the supply and demand for gold leasing is gone. The remaining demand (~25-30% of the leased gold back in 1999) is truly physical. It is the inventory leased to businesses that use gold as a raw material for fabrication (e.g. jewelry etc…).

If this is indeed the case, then what would "official support" look like today? Is physical gold still moving "in size" (but off market so as to not influence the price) with the help of the CBs like it was in the 90s? Well, since the first CBGA in 1999 it would appear that the CBs, along with the miners, have been unwinding a lot of what was wound up in the 90s. CB gold sales agreed under the CBGA declined until they all but disappeared in 2009, and in 2010 the CBs turned into net buyers of gold.

Part of my thesis in those last three posts is that official support may have reemerged specifically because of the financial crisis in 2008. If this is the case, and if this official support included CB gold sales, then we probably wouldn't expect to see the CBs turn from net sellers of gold in 2008 to net buyers in 2010. So, perhaps CB sales are not part of the "official support" occasionally helping to keep the paper and physical markets attached.

What about leasing? As I mentioned in my New Year's post, when the CBs renewed their CBGA for the second time in 2009 they forgot to include the line limiting gold leasing which was present in both of the prior agreements. Does this mean they expanded (or at least intended to expand) gold leasing to support the market? I don't know, but as I've already pointed out, it doesn't make much sense today even though it did in the 90s.

For one thing, expanding gold leasing operations tends to increase liquidity in the gold market which tends to drive down the price, yet as I said in my last post, the rising price of "gold" has been a major leg of support. Also, nearly 70% of the "users" of leased gold in the 90s no longer want it because now it's a losing proposition. So even if the CBs wanted to expand their leasing operations, the demand may not be there to get it done.

As I wrote in The Two-Legged Dog, a "long physical gold" position does not support the "gold" market (help keep paper gold attached or fixed to physical), instead it stresses and threatens it. Short physical and/or long paper gold are the only "positions" that support today's (quote-unquote) "gold" market:

"The position that lends the most support to today's "gold" market is "long paper gold and short physical gold." This was the position of Western gold bugs during the early 90s—trading in their physical for paper gold."

It was also the position of the CBs during the late 90s, selling physical and leasing. But today, or at least since 2009, the CBs in aggregate are apparently long physical. And an expansion of gold leasing not only doesn't make sense, it would tend to be counterproductive in an era where the rising price supports the market. In fact, what I was proposing in those last three posts was the occasional "official" levitation of the paper gold price at times when gravity would have otherwise prevailed.

Max De Niro asked:

"How is it that the ECB supports the paper gold market? Do they buy COMEX contracts, LBMA unallocated? Where would this show up on their balance sheet?"

Could there be another way? I don't know, so let's discuss it. And to kick off the discussion, I'll leave you with a few emails from my FOREX market insider. In the past I have called him FOREX trader lady or something to that extent. But from here on out we'll just call him FOREX Trader:

FOFOA,

This caught my eye in your latest article. The snippet from the old CBGA that was missing from the latest one in 2009:

"4. The signatories to this agreement have agreed not to expand their gold leasings and their use of gold futures and options over this period."

Recall the earlier discussion about which instruments were used to hedge nominal exposure to the price of gold?

There is your answer.

"Gold futures and options" has a very broad definition. I would guess that this allows them to operate with impunity on all the major electronic gold exchanges in the world.

-------

FOFOA,

This is what long paper short phys looks like on the spread. Thought you might be interested in the chart. This is a "monthly" of gold continuous front month futures contract minus spot gold price.

Theoretically this value should be synthetically very close to Gold lease rates "sell it now, buy it back in a month".

I thought it was interesting that the anomalies in this chart which resemble backwardation showed up in 2008 (and also today!) but not in 1999 or 2001. However, the 2008 anomaly seemed too early in the year to be October or November, where I thought it should be, so I asked him about it.

Sorry FOFOA,

Actually I think there is a problem with the X axis due to the nature of combining different futures contracts to make up the spread chart (i.e. front month is only front month until it isn't then another futures contract must be substituted and concatenated appropriately). So it may well have been later in the year. If I zoom in on 2008 specifically with a "daily nearest" rather than "daily continuation" it looks like this:

I told him that last chart made it even more interesting, and that I might use these charts in a post.

FOFOA,

If you are going to use them in a post, here is also the monthly nearest instead of monthly continuation. I provide the different ones because I can't really make a guarantee about the quality of the data.

From my personal experience of trading in Sep/Oct/Nov 2008: shit was fucked up. All markets I traded were the least efficient I've ever seen them. The contango on oil was so retard huge that JP Morgan was filling up tankers and storing for delivery later in the year. Here are just a few examples:

Thank you, FOREX Trader! My thesis is that today's (quote-unquote) "gold" market is somehow different from everything else. It is like the linchpin holding the wheels on a very old bus. It alone can bring the whole thing down if its legs fail. Very few understand this, and it's not even important if they do. It simply is.

Germany's Bundesbank plans to ship 50 tonnes per year from New York to Frankfurt for seven years for a total of just over 300 tonnes, and they announce this in advance (the gold hasn't moved yet as you can see from the FRBNY vault inventory). What's up? Just after 1999, they moved over 900 tonnes secretly from London to Frankfurt and didn't tell anyone until a decade later.

What are they up to? Make gold a topic of discussion without actually intending to change much? Rock the boat a little (but still feeling that their gold is safe in New York)? Tell someone in Washington not to mess with gold (that would be close to what Jim Sinclair is saying)?

Secondly, a remark on Another's statement that the gold remained in the CB vault and they wrote only certificates. In this interview

http://www.financialsense.com/node/8654

Jeff Christian says that whenever title of some gold in the FRBNY vault was transferred to a private entity (i.e. non-government, non-international organization), the FRBY wouldn't store it any longer, and it was carried literally across the street into a commercial bank vault (JPM at Liberty and Nassau if I am getting that right). So thanks to this quirk in the FRBNY regulations, what Another explained becomes a lot more transparent. This is precisely Dimitri Speck's idea for estimating the amount of leased gold!

Finally, if I was a Euro CB and I wanted to "support" the paper price, what would I do?

FOFOA, you write that the old demand for leased gold, mainly the financing of mining activities and the carry trade, must have disappeared simply because they are no longer profitable. In the same interview above, Jeff Christian says that CB gold leasing has by now been largely replaced by private gold leasing. He didn't say that the volume of the leasing had largely disappeared. He said that CB leasing has been replaced by private leasing.

Therefore, who is leasing the gold, and who is borrowing?

As long as their is a liquid market for leased gold, as a Euro CB intending to support the paper gold market, I could of course lease some more.

Alternatively, I could buy paper gold or trade some derivatives with the goal of increasing the paper price. As we said in "GLD talk continued", a low paper gold price leads to a larger outflow of physical gold from the market - based on the idea that the inflow of gold is constant in terms of weight (mining, scrap), but the outflow is constant in dollars (savers storing their surplus in gold).

Do feel free to have a laugh at its expense - unfortunately I won't be able to be here much to defend it. A lot of the ideas come from here though it still suggests a slow burn scenario and a successfully managed paper/physical link.

I have seen you speculate that the Saudis (or whoever) are leasing their private gold to keep the game going (because they can presumably get it back from the CBs if all else fails?). But does that really make sense? Who are the "users" of that leased gold (i.e., who is taking on the price risk of borrowing gold while the price has been rising)? Are the BBs borrowing physical willy-nilly from their best clients to fill allocation requests while delta-hedging their position when they could just as easily tap into GLD?

As I said in the post, about 30% of the demand for leased gold in the late 90s was from gold fabricators so that they wouldn't have to own/buy the raw materials outright during the fabrication process. If, as JC says, CB gold leasing has now been largely replaced by private gold leasing, my first thought would be that it's mostly that. Even in the 90s, 10% of the leased "gold" came from private sources. You say he didn't say the volume has declined. Did he say it hasn't, or was that an assumption? If 30% fabrication demand was met by 10% private supply in 1999 and fully by private supply today, that could represent a 200% increase in private gold leasing and justify the use of the word "replaced" could it not?

Leasing, the way it was part of the CB plan in the 80s, brings the liquidity of (hopefully expanding) future gold production forward into the present, whether it's real (as in from a mine) or imagined (as in from a hedge fund). The CBs just back that liquidity—give it credibility. The WGC papers explain that the gold leased by the CBs formed the basis for all gold derivatives. I wonder, have derivatives evolved at all since 1999? What if the base (foundation) were to shrink while the superstructure was expanding? You'd probably want to hire a quant to figure that one out.

"Finally, if I was a Euro CB and I wanted to "support" the paper price, what would I do?"

The Bundesbank story is a joke. If Buba is so concerned about their gold and wanted to make a statement, they could have bought gold on the open market and sell their gold in the US. Saves on "shipping cost" :)

"I can also tell from the amount of support that came in through email and Paypal that a lot of you do understand what I do"LOL - that is quite the little cult you have going - 'pay me - and I will praise you with understanding - the rest of you are confused'

That was a very interesting analysis and I found the GCF13:GCY00 charts from your contact particularly valuable. I have been watching and charting the LBMA GOFO and previously also SIFO for about three years now, just because I detected a link between XAU and the trend in GOFO back when I was still trying to time purchases.

GOFO does appear flattish in the last couple of months. I cannot get GCF13:GCY00 to compare like that on Barcharts. Still it would be intriguing to know how that pair reconciles with the GOFO as published, either in your friend's opinion or your own.

Why would the CBs start supporting the system again because of the financial crisis of 2008? Isn't a crisis what you would expect when the system is about to break? If they won't let it break during a crisis, then that means they won't let it break, period. Doesn't it?

Thanks, Aquilus! But I was really thinking of writings previously on this blog (which I was, perhaps erroneously, assuming FOFOA referred to above with his 2008 comment) suggesting that the transition was due a few years ago, but was then delayed because of the crisis. I've done some inept googling, and eventually found the snippet I was thinking of. It turns out it wasn't really FOFOA himself who said it, but rather FOFOA quoting Randy Strauss. If accurate, the comment would imply that the Euro and whatever else is needed was ready by 2010. I guess what I'm asking is: why delay it because of a crisis, when surely you can't bring it about and go through the transition without a crisis anyway. It's that old omelettes and eggs thing. :)

From a FOFOA comment on The View: A Classic Bank Run, where he in his turn is quoting Randy Strauss:

Various policy signs over the past several years had indeed pointed toward 2010 to be the watershed point in the international monetary transition, but the depth of the current commercial banking crisis likely argued strongly for a delay under the thought that calmer waters would facilitate a better transition. As such, the existing infrastructure and policy is largely in place at the present time, so a timeline for this store of value transition can be every bit as short as that for invoicing — essentially, no time needed for flipping the switch.

But in light of the current crisis and some of the policy efforts underway to restore calm to the commercial markets, it looks to me that the new timeline for significant transitions is mid-2013 consistent with the current policy talks driving the permanent European Stability Mechanism to that timeframe, but with that said, it could be set into motion at any given moment between now and then, and between your breakfast one day and breakfast the next.

My thoughts came from trying to put myself in the "skin" of a major producer.

From that perspective if I see a euro zone whose banking system is controlled by individual states that through regulation can "encourage" the local banks to buy unlimited amount of state debt, I know the lessons of the past: the banking system will be saved at all cost.

And I don't mind them introducing liquidity based on existing debt - that's a known. I do mind the spigot being open for future debt, with no one trustworthy guarding it, as that puts in doubt the future purchasing power stability of the euro.

So in that circumstance, I as a producer will not rush into the euro, not worth it at this point with those flaws, and the dollar will more than do until it starts failing.

But take away those uncertainties, and the currency looks good enough for usage IMHO.

Speaking of still existing flaws in the euro, it was in the news yesterday (I may have read it in a column by AEP) that by the Lisbon Treaty, a qualified majority of EZ member state finance ministers can force the ECB to enact a "dirty float" of the euro against any specified foreign currency. And a unanimous decision can even enforce a full fix against e.g. the dollar. A decision like that would really put a spanner in Draghi's works and end the talk of "our only mandate is inflation", wouldn't it?

My immediate reaction is to consider the "yes they could" from the perspective of "Cui Bono?" and if so why?

Let me ask it this way:

"Why go through the trouble of 30+ years of pain in establishing a differentiated currency, just to peg it to the old one?"

or how about this way:

"With the dollar hyper-encumbered by debt and failing, is it easier to start supporting it again or take advantage of your euro independence from the failing $, get out of the way with your wealth intact, your banking system recapitalized and move on?"

Again, I don't profess to know, I just try to think of the path of least resistance that would benefit the meaningful parties to these events. We all come to our own conclusions...

just some thought on the ECB and its competences in the Euro area. In 1999, they got full sovereignty over the exchange reserves. Neither the Fed nor the BoE nor the BoJ have that. That's a big difference in a currency crisis. Getting this privilege in 1999 probably wasn't that difficult because politicians had just learnt that the stock market always goes up, that financial crises don't happen anymore, that the Cold War was over, and so they could pass the technicalities on to the technocrats.

But still there is one open flank, namely the possibility that the commercial banks buy government debt and that the governments always bail out the banks. The ECB has some countermeasures, for example, applying specific haircuts to debt pledged as collateral for the repurchase agreements when the banks obtain liquidity from the CB. But eventually the ECB needs to make sure that the governments cannot affect monetary policy by bailing out commercial banks (or by providing a tacit guarantee that allows them to lever up arbitrarily).

Was the 2010/11 crisis in the Euro zone the long awaited opportunity to change bank regulation? I suppose that in the EU, nothing is passed unless Germany and France approve. In what situation would they approve? After Spain and Greece had already misused their privileges as regulators of their own banking systems, costing Germany and France quite some extra money to bail out these governments? Was the 2010/11 crisis an opportunity not to be missed?

On the other hand, assume that the peripheral countries of the Euro zone start to recover and, say, there will be positive news from Portugal and Ireland. Then the Euro zone would have demonstrated that they can weather a debt and banking crisis without abusing their currency. Then what would stop you from buying Euros as soon as the first problems of the dollar surface?

on leasing. Well, Jeff Christian didn't explicitly say how the volume of gold leasing has changed. But he said leasing by CBs had been replaced by private leasing, and it didn't sound as if he was omitting any much more relevant information such as a significant drop in volume.

Then we have this

6/2/98 Friend of ANOTHER

[...] The Middle Eastern bullion holdings are well hidden from official records. They control the gold market through the London/European gold paper markets. It was the BIS that handed them the market when it created the Central Bank lending deals. They were the prime buyers right off the bat! [...]

We do know that Kuwait leased some 70 (?) tonnes right after the Washington Agreement (am I getting this right?). Yes, I know that Kuwait has always been a close UK ally and that, in contrast, Saudi Arabia never was.

Doesn't it make sense that the other Arabs (Saudi, Emirates, etc) also played a role in filling in for the European CBs? If you can lease a large and varying amount of gold, you can indeed influence the lease rates and term structure of the gold market and thereby even affect other smaller gold leases. Also, the oil exporters (together with the U.S.) are still the main beneficiaries of the low dollar gold price.

The gold/Brent oil ratio has again been stable since the 2008 crisis and doesn't deviate from 15 any significantly. So there is still some "agreement on the gold/oil ratio" in place, i.e. some policy of the U.S. or the oil exporters or both that stabilizes this ratio. (It could be Saudi Arabia single handedly adjusting the flow of oil in order to target a dollar price that achieves the desired gold/oil ratio - but they do rely on the U.S. to make sure no other oil producer can graduate to a price setter).

Finally, who borrows gold? The following is basically Fekete's argument with the grain elevators. If you operate an exchange or if you are a market maker or even a large coin retailer, you have some business capital paid in in dollars. But initially, you don't have any inventory to begin trading. So you buy gold for dollars and then immediately hedge your inventory by selling the gold forward. In other words, you swap your dollars for gold. The interest you earn is precisely the contango of the gold forward market, i.e. acquiring and holding your inventory is profitable.

(By the way, if the ones who do most of the gold leasing can actually influence the lease rate and thereby the contango, they also influence the profitability of the market makers who have to borrow their own inventory - that's nice, too, isn't it?)

Basically paper gold is a lie, a fraud, not the real thing. We can only guess as to the true leverage ratio, but we can probably agree it is nowhere near 1:1. Liek many things, paper gold once had a useful place, but has been distorted into something grotesque by TPTB.I see FreeGold as a crucial element in getting our very sick society back to some semblance of normality, taking away the ability of financial conmen to ruin our marketplaces, all which are manipulated well past the point where the pendulum should have reversed direction. I say this because it would be naive to believe in totally free markets, absent of insider information, absent of monopolies and oligopolies, where the little guy can compete with the big guys on a totally level playing field. But what we have now is so out of hand, the fraud so open and in your face, we need an enema and we need it now. JR had one comment above, Manti Teo. Just another fraud, sports is riddled with them ( hello Lance ), but my point is every aspect of our sick society is riddled with this crap. Sports, entertainmnet of all kinds, of course every disgusting politician ( there are no statesmen anymore, just pols ); corporate fraud and IP theft; on and on. So in my mind Freegold would be a huge cleansing deal for society at large and that is why it is so important, not just for those who are protecting their wealth from theft by remaining inside the system. I am hopeful the societal consequences would be very impactful; as Ender stated, the West ( the proles ) need to re-learn what true wealth is, and how to protect your savings if you have any, from stealth theft through inflation, etc. The West will also learn it cannot just consume endlessly, that trade deficits cannot go on infinitely, that we need to earn our way or forfeit past wealth. The scary thing is the vast ignornance of the hoi polloi though. Is such a massive re-education into whats honest even possible at this point, even if/when FG should occur? We can only hope I guess.

To build on them, all taken together reduce the risk of negative purchasing power surprises for the euro for the short/medium time and reinforce the gradual loss of purchasing power inherent to any credit currency (that is good)

As a producer, seen the combined effect and the future positives, I would now be between ambivalent to very positive on it's future use for transaction settlement.

That does not mean I will rush to it, but I will not raise an eyebrow if contracts start to be denominated in it. I might even accumulate it and pay for my imports from Europe in it.

I still have no good market to get physical in euros for my surplus outside using FX for LBMA or spot. That needs to be addressed.

There was a fascinating article (by Nasser Kandil, I believe) in which he referred to gold as "the gold weapon" in the context of their "caliphate" and the coming conflict with the West.

Just another one of those wildcards I guess (channeling Glen Beck?) but I cannot find the article now, that website is all garbled and broken.

But I continue to have concerns about the balance of gold, of power, of wealth, of "artillery" in the context of these coming changes. I do believe that the Middle East has much more gold than is currently thought.

Even the gold for oil deal, if you do the math, places a lot of gold there by now, and historically Middle East banks have not really engaged in selling or leasing gold to my knowledge, as the west has for many years.

But here again, all the worlds financial infrastructure is wed to oil, a fossil fuel, and it could easily be replaced, I think, by LENR, which seems to me to have been completely shut down by the establishment.

Not to veer too far off topic, but the energy infrastructure regime, like the current IMF$ regime has far too many complex inter-dependencies to just "walk away from".

Which takes us back to the whole sustainability, can-kicking, support exercise.

We really need to have a good old fashioned world war with lots and lots of destruction, just short of nuclear confrontation to shock the system and its players into the reality of reality.

And it could be that the financial version of that will do just as well. Time will tell.

I have a number of questions, but will start with the simplest.What, exactly must take place to generate, or open, a "spot gold" account with a bullion bank, if you are a private party?Do you deposit physical gold into an unallocated account withthat bank, and receive a corresponding balance denominated in ounces in a transactional account, like a bullion checkingacct? Is it from this account that you sell spot, receive currency,and (after buying the future gold contract hedge), invest thecurrency proceeds in order to obtain a yield?

How is this process different if you are a bank? Do you stillneed to "hold physical" in order to sell spot, or will a CB's promise, (or that of a private bullion holder to deliver) suffice?In the case of the latter, does the allocated/unallocated question arise as an issue.

A friend: A bank can be "populated" with unallocated gold accounts in two primary ways. It can either be done as a physical deposit by a silly person or by another corporate entity, or else it can occur completely in the non-physical realm as a cashflow event whereby a customer with a surplus account of forex calls up and requests to exchange some or all of it for gold units, whereupon the bank acts as a broker/dealer to cover the deal – occurring and residing on the books as an accounting event among counterparties rather than as any sort of physical purchase. No bread, no breadcrumbs, only a paper trail and metal of the mind. This is how the LBMA can report its mere subset of clearing volumes averaging in the neighborhood of 18 million ounces PER DAY. Just a whole lot of "unallocated gold" digital activity as an ongoing counterparty-squaring exercise.

Would it be fair to characterize these "gold units" as "synthetic"gold, that is, credits into an account, in exchange for currency (of whatever denomination) that simply promise to "act as goldacts", by which I mean, MIMIC the price movements of "gold" inthe futures markets on a 1 to 1 basis, minute to minute, day by day? If so, this is very much like the "synthetic" credit instrumentsof 2001-08.

This has me, and seemingly some commenter's at ZH, wondering, is this like a inverse GLD puke for silver?

Yes, in the appendix to my GLD article, there is the same trading strategy for silver and SLV. Yes, after an inverse puke ("overeating" ?), the silver price underperforms on average.

Between a puke and an overeating, silver rises at an annualized rate of 28.7% whereas between an overeating and a puke, it rises only at an annualized rate of 11.6% (both, of course, on average over the entire period of the analysis).

Woland,

What, exactly must take place to generate, or open, a "spot gold" account with a bullion bank, if you are a private party?

The big banks wouldn't normally deal with you OTC as a private counterparty, but if you have a company that is a member of the ISDA (this deals with all the collateral requirements etc.), you can simply phone them.

In addition, some of the internet brokers, for example Interactive Brokers, offer spot unallocated gold and silver on margin. But this is only unallocated currency trading similarly to EURUSD, and you cannot allocate. If you want the option of allocation, you need enough funds for multiple 400oz LGD bars, and you need to be an ISDA vetted counterparty for one of the BBs.

Now VIP private investors will probably get access to LBMA gold accounts as well, but I suppose you need someone to introduce you. Some prince of a well-known oil exporting country comes to mind.

Thanks for clarifying your theory. FWIW I think this is the crucial point from FX Trader:

This caught my eye in your latest article. The snippet from the old CBGA that was missing from the latest one in 2009:

"4. The signatories to this agreement have agreed not to expand their gold leasings and their use of gold futures and options over this period."

Recall the earlier discussion about which instruments were used to hedge nominal exposure to the price of gold?

There is your answer.

"Gold futures and options" has a very broad definition. I would guess that this allows them to operate with impunity on all the major electronic gold exchanges in the world.

Could the exclusion of these words from the agreement be accidental?

It seems much more likely to me that it was intended to validate a policy adopted earlier at the onset of the crisis.

Again FWIW, I don't think that it should be assumed that the ECB and bank regulators were aware that European banks were up to their elbows in the sub-prime and derivatives at the heart of the banking system crisis which is driving this ongoing debacle.

Perhaps that is the reason that the goal posts had to be shifted beyond Randy's 2010 launch date.

Posted on the previous thread, then found a new one had started. Just wanted matrixsentry to see it.

@matrixsentry - JS was posting at Jim Puplava's site for a year or two prior to creating his own. That period was kind of a hoot because he was going all bonkers over $354 gold and the derivative bomb it was going to set off. Maybe he'll reveal what that was all about some day. I always wondered what came between him and Puplava, if anything. Huge energy in his posts back then, and easier to read. Lots of Harry Schultz via JS type interaction as well.

Anyway, shortly after he started JSMineset, around the time he had a bunch of us faxing him charts we'd analyze, and he'd comment on and fax 'em back, someone (pre-CIGA) asked him if he'd read the Gold Trail and A/FOA. He said yes he had and that he hoped it didn't come to that. A very short and terse, one-time response. He's never said a thing about it again, until his recent comments. So, he has known about it all of these years. I tend to think that a person just doesn't forget the Gold Trail, especially a man like Jim Sinclair.

I'd appreciate a link to the chart by CIGA Pat that Sinclair referenced, if anyone has it, because it sounds like it's related to changes when comparing ECB financial statements. He says he published it, but backtracking hasn't surfaced it. Something appears to have changed pretty dramatically, if the ratio part of my brain is still in working order. Maybe if Belgian is reading here, he could provide some insight? Much appreciated in advance.

Mr Sinclair predicts that the Bundesbank's action will prove the death knell of dollar power. I do not really see where this argument leads. Currencies were fixed in de Gaulle's time. They float today. It is within the EMU fixed-exchange system -- that is, between Germany and Spain -- that we see an (old) gold standard dynamic at work with all its destructive power and the risk of sudden ruptures always present. The global system is supple. It bends to pressures.

My guess is that any new gold standard will be sui generis, and better for it. Let gold take its place as a third reserve currency, one that cannot be devalued and one that holds the others to account, but not so dominant that it hitches our collective destinies to the inflationary ups (yes, gold was highly inflationary after the Conquista) and the deflationary downs of global mine supply. That would indeed be a return to a barbarous relic.

Hopefully, it will be nothing like the interwar system. That was a dollar peg that transmitted US deflation to the whole world when the Fed tightened too hard in 1928 and went berserk in 1930.

A third reserve currency is just what America needs. As Prof Micheal Pettis from Beijing University has argued, holding the world's reserve currency is an "exorbitant burden" that the US could do without.

The Triffin Dilemma -- advanced by the Belgian economist Robert Triffin in the 1960s -- suggests that the holder of the paramount currency faces an inherent contradiction. It must run a structural trade deficit over time to keep the system afloat, but this will undermine its own economy. The system self-destructs.

A partial gold standard -- created by the global market and beholden to nobody -- is the best of all worlds. It offers a store of value (though no yield). It acts a balancing force. It is not dominant enough to smother the system.

Let us have three world currencies, a tripod with a golden leg. It might even be stable.

Imagine that, an independent and free gold, floating and beholden to no currency, serving as a store of wealth. A partial gold standard!!! ;>0

"I have been outlining this evolution to you for more than a decade. This article touches on it, but does not outline it. This article smells it but does not yet fully appreciate it. This process is behind the ascendancy of the euro despite every bear argument to the settlement currency of choice."

"This is happening in the marketplace, and not behind closed doors in smoke filled rooms. Yes, there are closed doors involved in it, but they are free market proponents. I know more about this than even the people who have already adopted a name for it."

FWIW I exchanged emails with Jim a couple of weeks ago. He responded to three of my emails and stopped on the fourth when I asked him how the price of gold would be discovered -- based on the merit of currencies or against an SDR of some specific currency with a fixed peg? That's where it ended.

His comments to me definitely sounded gold standard-ish as in price fixing -- but he wouldn't mention exactly how that price would be discovered/mandated.

I don't think that it should be assumed that the ECB and bank regulators were aware that European banks were up to their elbows in the sub-prime and derivatives at the heart of the banking system crisis which is driving this ongoing debacle.

I said before that I disagree. I know that Richard Werner asked Trichet at Davos why he was pumping up the credit volume in the periphery while the ECB restricted credit growth in France and Germany. The reply that Werner got was the sort of BS you get when the other side knows exactly what's going on, but doesn't want to give away anything and doesn't want to discuss it. Trichet said something along the line of "but we don't target credit volume, we do target interest rates." - completely misses the point, and obviously, Trichet isn't stupid. So my conclusion is that they knew _exactly_ what was going on.

I communicated with Jim many years ago and it was clear -- as giving of himself as he is -- that his pedigree is that of a trader and that as a trader (think: card player) he's going to tend to keep his hole card covered.

Okay, let's assume for the sake of argument that they knew despite the lack of cross border regulation and oversight in the European banking system.

Elements in the BIS clearly had long running concerns throughout the build up to the GFC. White and other BIS economists were publishing about it but official BIS policy didn't reflect a belief in the warnings.

Do we assume that the upper echelons of the BIS and ECB viewed the looming crisis as a strategic opportunity?

I'm still reviewing the data presented in this new study of international trade. Thus far it pinpoints at least one major factor that leads me to assert that the current national accounting regime and the BOP outcomes it depicts are a distortion of reality. A couple of snippets (my emphasis):

16/01/2013 - Business competitiveness and export performance are increasingly tied to countries’ integration into global production chains and a willingness to open markets to wider imports, according to preliminary international trade data released today by the OECD and the WTO.

The joint OECD – WTO Trade in Value-Added Initiative breaks with conventional measurements of trade, which record gross flows of goods and services each time they cross borders. It seeks instead to analyse the value added by a country in the production of any good or service that is then exported, and offers a fuller picture of commercial relations between nations.

“Countries’ capacity to sell to the world depends on their ability and readiness to buy from the rest of the world,” OECD Secretary General Angel Gurria said during the launch of the new database in Paris with WTO Director-General Pascal Lamy, EU Trade Commissioner Karel de Gucht and New Zealand Trade Minister Tim Groser.

For example:

... China’s bilateral trade surplus with the United States shrinks by 25% on a value-added basis, reflecting the high level of foreign-sourced content in Chinese exports.

Yeah. The only thing is, I used to take allot of comfort in the idea that when the price of paper gold falls, there will be no physical available.

But the slower this process takes, the more likely you will be able to get physical at lower prices. Because people are so clueless. Gold bugs that bought at $800 might be inclined to sell some at $1400 or $1300 and so on.

It is highly likely that, for some unspecified period of time, likely a very brief period of time, some small crustaceans will be amenable, perhaps even eager, to selling off their modest physical gold holdings just around the time that the physical and paper gold markets manifestly break from one another. It may not be easy to find them, but they will be out there.

M, "bad timing" is my middle name, but FWIW I would bet ebay might be good pickings at the right time. The theory of freegold isn't well known and when the POG starts tumbling, I suspect those with a few inherited pieces, and others that picked up a few coins/bars over the years will be selling. I wouldn't be surprised if they missed (for awhile) that gold had gone into hiding.

It would only be the crazy, brave or evil gold holders that would buy at that time ...... i imagine that ebay is not the domain of central banks and giants ;)

I think it's worth putting a bit aside for that potential opportunity, as I am very limited to accumulating at todays prices regardless of whether or not it represent true value.

I don't like any interpretation in which I have to assume that the relevant people (Trichet etc.) are stupid. They definitely are not. Either they understand (most of) it and cannot act because for some reason they don't have the power to do so and thus prefer to remain silent, or they understand it and chose not to act.

FYI, GLD reached a maximum inventory of 1353 tonnes on 7 December and has been losing inventory since then, down to 1332 tonnes as of today (back to the level of 5 November 2012). On one day, 3 January 2013, the inventory loss exceeded 7.7 tonnes and therefore qualified as a "buy" signal according to my algorithm.

Looking at today's price chart with the "V" in it, I was expecting a puke, but today we lost only about 2 tonnes.

Perhaps you would like to expound some theories as to the dynamics of why SLV (or GLD) gorges would signal a declining price.

It might help explaining why pukes are linked to price increases.

Have you done a similar study to investigate linkage between price decreases and gorges? Granted data points maybe be scarce as ETF's were created during the current bull market.

What is the lag between pukes and price increases? We may have a gorge data point forming after all, and the lag should be similar I would think.

Also, aren't pukes normally present during declining market price trending, so wouldn't gorges be present during price increase trending normally? Since silver has been trending down lately afair, wouldn't this be an odd time to see a gorge?

"I don't like any interpretation in which I have to assume that the relevant people (Trichet etc.) are stupid. They definitely are not. Either they understand (most of) it and cannot act because for some reason they don't have the power to do so and thus prefer to remain silent, or they understand it and chose not to act."

This seems very rational to me.

It is not a good idea to assume that any major player is either a) lacking data or b) incapable of usefully processing it. If we understand, they understand better. That does not mean they are omnipotent. A factual balance of power should therefore be assumed to exist between well-informed, rational self-interested players with substantial but finite power. Observed events will fit into that real world situation.

I listened to Jeff Christian and, as far as I can tell, what he said supports my thesis. Aside from the fact that he's obviously with the WGC/MSM in swallowing the "CBs wanted to earn a little interest on their idle asset" story, what he describes fits my post. What he said precisely was, "what we've seen over the last 15 years is that central banks have pulled back from lending as much gold out, and private sources of gold have continued—have increased—the amount of gold they're lending out."

Kind of interesting was that one of the reasons he said the CBs stopped lending gold was the credit worthiness of their counterparties. He further explained that the CBs were especially cautious after the Drexel Burnham bankruptcy in 1990. I thought that was an interesting comment since 1990 was the time when the CBs really accelerated their gold leasing according to both ANOTHER and the WGC.

Also, he said "over the last 15 years… central banks have pulled back from lending as much gold" and then he went on to explain that it was because of credit worthiness. But this "15 years" also caught my attention because that's right when ANOTHER explained why they would do so (with foresight rather than hindsight):

All CBs will now slowly stop all leasing operations and allow the market to size itself.

Date: Fri Mar 20 1998 22:12 ANOTHER (THOUGHTS!) ID#60253:

The [central] banks do want gold to rise now, and they will pull in physical gold to replace leases, even if they must "pay high on the market". They do not rollover these loans now.

8/19/98 ANOTHER (THOUGHTS!)

…it did announced the end of EMCB leases.

Jeff Christian said that this practice of CB gold leasing began in the early 80s when he, Jeff Christian (while working for J. Aron which was acquired by Goldman Sachs at that same time), talked the CBs into leasing their gold for almost no interest (30 basis points or 0.3% is what he mentioned). He mentioned 1981, which was when Goldman bought J. Aron, so we can deduce that JC convinced the CBs to earn a little interest on an idle asset around ~1981/1982.

ANOTHER confirms that this was the timeframe when the CBs began leasing gold as part of their "plan":

Date: Sun Apr 19 1998 15:49 ANOTHER (THOUGHTS!) ID#60253:

It truly started with Barrick, in Canada in the 80s. It was a "thin market", but grew big in oil.

This fits! After suffering huge financial losses in oil and gas, Barrick changed its focus to gold mining around 1982, went public in Canada (Toronto) in 1983 and acquired its first gold mine in 1984.

This might be one of those chicken/egg problems. Did the European central bankers hatch their "plan" to delay the collapse of the global reserve currency long enough to launch a backup currency before or after Jeff Christian presented them with the lucrative offer of earning 30 basis points per year by letting him (temporarily) wheel their gold across the street to the JP Morgan vault? I kid you of course, because we all suffer a bit of inflation in our own personal memory banks. ;D And the mundane details of JC's recollections certainly square with ANOTHER's!

But ANOTHER definitely said CB gold leasing was part of a plan. It was a plan that was supposed to keep the price of gold low (close to production costs) while enabling the mines to dramatically expand production at the same time:

Date: Sat Mar 07 1998 13:08 ANOTHER (THOUGHTS!) ID#60253:

To grasp the fact that the CBs had a plan, is to know that they lend the gold for only 1% or 2% while the proceeds set in a Bullion Bank and grow with interest for the benefit of the BB and the mine! And further, the lenders allow the return of the gold to be extended out for many years, as in "spot deferred". The CBs allow public opinion to think of this as "typical government stupid", it's not!

Unfortunately, there was a flaw in the plan that could not be foreseen:

Date: Fri Dec 12 1997 21:06 ANOTHER (THOUGHTS!) ID#60253:

The fatal flaw was found in the "forward sales" of unmined gold. The whole system counted on the expansion of cheap mining techniques to supply much more gold at a cheaper price far into the future. This happened to a degree for a few years but then just leveled off.

This flaw forced the CBs to become "the primary suppliers by replacing openly held gold with CB certificates. This action has helped keep gold flowing during a time that trading would have locked up." Victor, of course some "gold leasing" continues today, but it has obviously declined substantially since 2000. You wrote:

"Finally, who borrows gold? The following is basically Fekete's argument with the grain elevators. If you operate an exchange or if you are a market maker or even a large coin retailer, you have some business capital paid in in dollars. But initially, you don't have any inventory to begin trading. So you buy gold for dollars and then immediately hedge your inventory by selling the gold forward."

When I wrote "fabricators", that was a poor choice of umbrellas. I probably should have said "consignment and other inventory" which includes "Refining consignments", "Jewelry" and "Inventory/investment" as that first WGC paper broke it down. This is all included in that 25-30% of 1999 leased gold "users" that I meant to cover with "fabricators":

"The estimates of inventory include consignment stock held by jewellers, consignment stock held by other industrial end users of gold and investment gold traditionally held in the high-carat low markup consuming markets." [1]

But the real question is whether or not today's "gold leasing" is a support leg for today's paper gold market, official or otherwise. In the 90s it was (and it was most definitely official). But it was not the volume that was the support. It was the expansion of the volume. The 90s was a decade of falling gold prices and expanding gold leases, from 900t to 5,000t. Here's how that second WGC paper explained it:

"So long as the net short position [me: the volume of gold out on lease] is stable, with the initiation of new contracts being offset by the maturing of old contracts [me: new leases balanced by unwinding old leases], the effect on the spot market is neutral. But over the decade of the 1990s the amount of hedging increased rapidly, with much of the increase occurring in the second half of the period. The net short position increased by a total of some 4,000 tonnes, or around 400 tonnes/ year on average. To put the point another way, to meet the demands of the derivative markets, holders of gold increased their lending of gold to the market by some 4,000 tonnes." [2]

Yes, the CBs kept leasing and also rolled over their old leases rather than calling them in. But that was okay, because the gold rarely left the vault (or at least the neighborhood). It was all a financial transaction. Victor, you wrote (quoting FOA):

"[...] The Middle Eastern bullion holdings are well hidden from official records. They control the gold market through the London/European gold paper markets. It was the BIS that handed them the market when it created the Central Bank lending deals. They were the prime buyers right off the bat! [...]"

This is what he was referring to (from my post):

Date: Fri Nov 28 1997 23:29 ANOTHER (THOUGHTS!) ID#60253:

The BIS set up a plan where gold would be slowly brought down to production price. To do this required some oil states to take the long side of much leased/forward gold deals even as they "bid for physical under a falling market". Using a small amount of in ground oil as backing they could hold huge positions without being visible. **For a long time they were the only ones holding much of this paper.**

So the Saudis held ownership of CB "certificates" until the mines produced the gold they had sold forward. Then, the "lease" would normally be unwound. If the Saudis had actually taken delivery and shipped the CB's physical back to the desert (which they didn't because there was a deal) then the CBs would have taken that new gold from the mines. But, instead, the Saudis got the gold from the mines and the "CB certificates" went back to the BBs. But rather than canceling those "certificates" (unwinding the leases), the CBs just rolled them over and let the BBs resell them which contracted more future gold, funded more mine exploration/expansion, and kept more big money out of the spot market. In addition to reselling the old "certificates", the CBs also lent them new ones, expanding the leasing operation from 900t to 5,000t in less than 10 years. As ANOTHER said:

The question is not "Are the CBs worried for the return of gold?" but, "Has our paper been lent to the wrong people?".

What he meant there was not that the Asians were buying up spot physical driving up the price (he said they only bought low and lower), but that they were buying up mine forwards, the physical from which was supposed to go to the Saudis per the oil deal. A deal like that can only work until someone else figures out the game.

"The effect of hedging by producers and fabricators is to bring forward or accelerate sales in the spot market. The volume of sales brought forward is equal to the net short position of hedgers and speculators." [2]

Hedgers and speculators in this case meant miners and hedge funds respectively. The volume of sales brought forward increased liquidity and kept the price down. Or at least the expansion of that volume did. If the mines had kept up production expansion with the paper expansion it would have been no problem. But they didn't.

After the launch of the euro and the CBGA, the price of gold started rising, "stretching out" the existing physical reserves. The mines unwound a good portion of their hedge books with cash, not gold. Remember this? Barrick took a $5B loss and diluted its stock just to get out of its 1990s hedge book in 2009. The press release:

Barrick Gold Corporation (NYSE: ABX)(TSX: ABX) announced today that it has entered into an agreement with a syndicate of underwriters, led by RBC Capital Markets, Morgan Stanley & Co. Incorporated, J.P. Morgan Securities Inc. and Scotia Capital Inc., for a bought deal public offering for gross proceeds of approximately $3.0 billion representing 81.2 million common shares of Barrick at a price of $36.95 per share.

Barrick intends to use $1.9 billion of the net proceeds to eliminate all of its fixed priced (non-participating) gold contracts (the "Gold Hedges") within the next 12 months and approximately $1.0 billion to eliminate a portion of its floating spot price (fully participating) gold contracts (the "Floating Contracts"). A $5.6 billion charge to earnings will be recorded in the third quarter as a result of a change in accounting treatment for the contracts"

More later if I have time. But my point is that I don't think "gold leasing" is part of paper gold's support legs today, private or official. Yes, there is still some leasing going on, for the above noted purposes. Is it expanding or contracting? Is it official (done at a loss "for a purpose") or private (done for profit)? Good questions.

The main point of including FOREX Trader's emails at the end of my post was that the line in the CBGA that included "leasing" also included a phrase that may be a catch-all for gold derivatives. So if there was official support occasionally levitating "gold" since 2008, and if it was not outright physical sales or leasing like the 90s, then maybe it was derivatives. How? I don't know. But (and this is for Max De Niro) derivatives are a way to mask whatever it is you're doing. They don't necessarily show up on the balance sheet as you would expect. ;D

Those BB 'spiders' have superior information and are in futures, ETFs, and physical markets.

BRON: Bullion banks are like spiders in the center of a web. They can feel the twitching of the flies in the web and determine the mood of the market better than anyone else and often in advance of others.

For example, if Mints are starting to see an increase in demand and begin running down stocks, they will start to take delivery ex-bullion banks, who as a result now have intel that retail demand is picking up before anyone else sees it in reported coin sales.

I think you also missed out that bullion banks also provide hedging and banking to industrial uses as well as miners. As they sit on both sides they can, again in advance of other market participants, feel the sentiment of those two sides by their flow/level of interest in hedging.

"Do you really think you can go through the demise of paper gold without first going through the mania stage of gold (all forms) for the public at large.

I've been a professional investor for several decades....I remember the 1970's and the last mania for gold. I also remember that during one of those years the # 1 best performer on the NYSE was a company called "Scott's Liquid Gold"....all that mattered to the public was that fact that it had "gold" in its name. No nevermind as to the fact that they sold gold colored paint to the hobby crowd. Do you really believe the public will understand the nuances of physical vs paper before first succumbing to a mania for all gold, even the wrong kind?

I guess, I am a "freegold socialist" at heart. Clearly, from a standpoint of paper gold support, leasing is contracting relative to the gradual rise in paper price of the 90s.

But my hopes and dreams rest upon that massive ocean of shrimp at the bottom of the gold pyramid.

We can analyze and predict the logical activities of the BBs, CB's and G's (and quasi-G's) and I must say after a very strong cup of coffee, a good night's sleep and rereading what has been restated (very clearly -THX) we can get a good picture of official support.

But when it comes to the emotional response of the global shrimp community all we get is "record coin sales this month" 2 months in a row, and " US mint all out of silver coin".

So the question of support at the bottom of the pyramid looms large for me, i.e. is the public net accumulating or net divesting? That is a much bigger leg than investment (including shrimp pensions, etc.. which do invest in paper) or official.

Just as hyperinflation is an emotional response to PUBLIC loss of confidence in the issued paper, I see the onset of freegold as a parallel rush to it's "good twin" physical gold.

So John, I see the mania stage in gold as being a manic rush to physical, not paper, since the shrimp are far less sophisticated than to rush into paper that they are already apparently seeing the demise of in their own unsophisticated terms.

Likewise, as the wheels of the great debt machine continue turning, and the "WE BUY GOLD" arrows keep spinning on street corners everywhere my little car takes me, is that massive source of physical gold net divesting or net retaining?

Throughout the decade long "slow boom", surely this leg was net divesting for paper gain, but now we are in this sideways dance, and we begin to see Shrimp, as far as I can tell, buying coin like never before??

Consider that, as FOFOA has just said, "the physical from which was supposed to go to the Saudis per the oil deal. A deal like that can only work until someone else figures out the game.

Or queers the game through an unpredicted shift in shrimp sentiment? This again is a testament to gold's impervious quality over the ages. We live in a world of finite resources and despite all aspirations that technology will overcome, YOU CANNOT CHANGE THE RATIO OF STOCK TO FLOW.

So FOFOA, thank you for that articulate reminder that RATE OF FLOW (expansion or contraction of it) IS the KEY, and John, thank you for reminding us that freegold socialism consists of two mirrow image components: lack of confidence in the evil twin (paper) and a heroic dash to "traditional" money, GOLD.

The western investor/gambler/consumer is going to drive freegold forward? The clueless borrower? Better to walk in the footsteps of giants.

FOA: The gold market is made up of a very broad spectrum of investors. At the very farthest ends of this spectrum lie the persons with the largest influence on the physical bullion. The super wealthy at one end and the "third world no ones" at the other. The middle is occupied, mostly, by the "investors with western thought". The far ends buy bullion. And they don't buy it as a gamble or a game! It is a way of life that has worked, through thick and thin, even before the West was "The West".

Now, on the other hand, this "modern day middle of the spectrum"! Well, they have read why we need gold, but they have never "Experienced" the need for gold! Until that day, when they gain "Experience", most of them will make "A Gamble That They Never Intended To Take". Yes, they do invest in all forms of paper and or leveraged gold and all the while, expounding from the roof tops the coming currency crashes and stock market declines. Even looking for bank closures and bank runs, as they cling dearly to comex options and gold stocks.

Another said: "Gold! It is the only medium that currencies do not "move thru". It is the only Money that cannot be valued by currencies. It is gold that denominates currency. It is to say "gold moves thru paper currencies"

If this statement appears the least bit cryptic, if it does not make 100% crystal clear sense, then little else written on this blog by either the contributors or the scant few commenters who do understand it will make complete sense to you, despite your best efforts.

You see, my friend, in this world there are two types of people: those who PRODUCE, and those who consume. YOU consume.

Those who PRODUCE, and there is perfectly good reason why it is written in caps, are giants. Everyone else, including YOU, is a shrimp.

Another’s statement above is the perspective of the giants, not the shrimps. So don’t feel bad if its inherent truth is not self-evident, you have simply never directly experienced life as a giant. No shame in that! That in itself means nothing at all.

Except that you don’t have the perspective from which to understand gold. So you'll have to build it from scratch.

In this case actually understanding gold means firstly having to discard an awful lot of fundamental beliefs about the way things work. This is also the single biggest barrier to discussing gold with anyone else… they will never understand without ditching some of what they hold as fundamental beliefs, so you may as well not bother. If you win anyone over it is ultimately only because of their faith in you and your perceptions, not their own understanding. But I digress.

You may appreciate that we need gold to fix our monetary system, but that does not mean you actually understand how gold really functions.

Gold functions as the ultimate store of value. Nice words, nice idea, but you are a shrimp. You’ve never had value in a quantity that needed storing. Sure you may have “savings”, but you’ve never personally experienced diminishing marginal utility to the degree that gold’s function becomes apparent, so it remains a theory. There is a monumental difference between mere theory and theory corroborated by experience. The latter has graduated from theory to fact.

This is the basis of my previous comment about ‘new money’ and the fact that it does not necessarily understand gold. New money for the most part believes it has its surplus value securely stored in various financial instruments. Old money (real giants) knows better. This perspective is also why the idea that Oil would not require physical gold for their surplus is preposterous.

Another told you that you could follow in the footsteps of giants, and you can, but if you want to see their perspective there’s a bit more involved.

So with this diminishing dollar support from other Central Banks, who has to pick up the slack? Yes, Bennie the printer. If he did not do this people’s savings would be wiped out almost instantly. This is because savings in bonds is saving in debt.

So the debt must be saved at all cost. QE is non economic buying of debt as well as the saver of camouflaged financial community worth-less paper. That is why your QE to infinity is absolutely correct.

CIGA Patrick

Dear Patrick,

QE at the present time is correct in a perverted manner. It is the only means to save the sinners from the ramifications of their financial fraudulent sins as rationalized above. Therefore it is right in a practical sense devoid of higher causative motives.

There simply is no other tool, none whatsoever, that can do the job at this point.

I have taken the liberty of adding the exchange between VTC and FOFOA above to the end of the Legs post in the 2013 compendium. For newbies, all FOFOA posts can be found in annual compendium PDF form at Ron M's Air-Friendly PDFs in FOFOA's link list.

Thanks again to Trail guides JR and Jeff; they have the uncanny ability to pick out and post perfect past nuggets, that are germain for current comments discussions. They are like Grad students helping the new fish.

I know I'm repeating myself from the previous thread, but emerging market stocks and soybeans both bottomed in the same time period as gold in Q4 2008. Why did the central banks need to 'levitate' one paper market (gold) but not other paper markets?

We know why the gold price - uniquely - is repressed by the mere existence of a paper market. But it doesn't follow that the gold paper market is so worthless it needs artificial support.

In fact the paper gold market has occasionally proven so strong it's been artificially depressed by central banks (pre-CHF devaluation being the obvious and incontrovertible example). How can that be reconciled with something that is so weak it needs artificial legs?

Unless, that is, we have a model that explains why manipulation of paper gold in both directions supports the connection between physical and paper price discovery.

If you conclude we're now in a bear market for paper gold, by implication you believe that Western investors will shun paper vehicles going forward. For what it's worth I think they'll do the complete opposite. In reality Western investors buy paper contracts on anything without hesitation as long as it has momentum.

"So John, I see the mania stage in gold as being a manic rush to physical, not paper"

I respectfully disagree. The public knows only paper and they fear what they don't know. They don't know coins and they don't know how to buy them or even what coins to buy. They know paper, they know stocks and that's precisely what they will buy and positive "manic" momentum will fuel and reinforce this.

The "public" will not bring on Freegold through a rush into gold coins. The public will never get onboard until after the fact, when the wisdom of owning physical gold is self evident.

A market for convenient allocated gold products will spring up following the demise of gold derivatives. Joe Public will simply trade his currency for allocated ounces to save, then trade his ounces back into currency when he is ready to consume. No need to "learn" physical gold, it will be exactly like what he is used to now with stocks, ETFs, and mutual funds. Joe will simply understand that his "allocated physical gold fund" offers the ultimate safety after living through the destruction of his paper wealth, including paper derivative gold.

So we seem to be saying that the middle tier of "investors of western thought" will not be gradually converted to "3rd world no ones"? Or maybe they will, but only after they are holding on to clumps of smoldering ash?

I have never directly invested in paper myself in any significant way, as I would rather produce something from the sweat of my brow that has value in the marketplace for which people will pay me the prevailing currency (you know, the old fashioned way).

I much prefer this way of earning my place in this world over sitting on my ass and living off other people's losses.

So make no mistake, I am a producer of marketable value, and not just a consumer (or profiteer off of other people's bad bets). But I do hold metal. Do we all think everyone out there buying coin is mostly an "investor of western thought" who is completely unlike me?

That may have been, at one time, but is that the same group that is accelerating their holdings now? because they feel they can paper out at a later top?

It could be .. but do we have a way of knowing that which is as precise as the way we analyze the actions of official monetary regime activity?

Maybe I'm guilty of a self-reinforcing bias, but I suspect that many new buyers of physical gold are accumulating it as a hedge against total collapse, not just inflation. The parallel move in record breaking gun sales does not to me indicate fear of inflation but rather fear of total collapse and social DISINTEGRATION !!

Yes, some may cash out in desperation at some point in time, but I do not know all the reasons, motives and justifications of every shrimpy member of this very large pyramid bottom.

I find it somewhat odd that others seem to know exactly what they are all doing, and why, even though I do not.

Many things are done in this world for the wrong reasons, and yet they bring about the right outcome.

If the public doesn't know coins and doesn't know how to buy them, then please tell me who is buying them all, in consecutive record breaking amounts, and how?

Or are we saying these reports are a coordinated sales gimmick?? Maybe 3rd world no ones are buying US Eagle gold and silver coin ... or giants? I don't think so.

I have a question about the specific meaning of a phrase quoted in a paragraph by Another;

"[Central] banks do lend gold with a reason to control price.If gold rises above its commodity price, (me: cost of production)it loses value in discount trade".

My reading of this is that "discount trade" refers to oil soldBELOW the currency price OIL would otherwise demand, in return for gold being made available to OIL at a price far lower than would otherwise be possible, without the CBleasing/intervention. Is this the correct interpretation ofthe phrase?

(I am reminded of the old example by Another of $30 oilplus X amount of gold, then later the same $30 plus XX amount.)

I have a couple of questions I'm hoping the good people of this site can help with.

I was thinking about the recent increase in American tax rates. What happens to tax policy in times of hyperinflation, or high inflation? If people's incomes are nominally increased due to a decrease in the value of the dollar, do the tax rates increase proportionally? Or do increases in incomes due to inflation cause everyone to jump into a higher bracket? It seems if everyone was all the sudden making $250,000 and being taxed at the higher rate, the government would have increased nominal revenues with which to pay the debt. (assuming they didn't increase spending...so this is completely hypothetical) In my mind, it's a kind of forced austerity, whereby the individual or family would be forced to live using a lower percentage of their income.

My second question deals with the velocity of money. In the link below, the charts indicate a falling velocity. I referred to notes I took (I believe from the Exorbitant Privilege post), where I wrote the following:

"As demand for a currency falls, the velocity of the currency rises.

A rising demand for a currency leads to falling velocity and a longer store of value.

In periods of economic stability, the supply side, or the Printer, controls the value of a currency.

In periods of economic instability, the demand side, or the Market, controls the value of a currency."

Based on the charts in the link, velocity of the dollar is declining...which according to the above, implies there is a demand for dollars, resulting in a longer store of value.

So I'm a bit confused. If support for the dollar is waning and people are worried about the value of their dollars, wouldn't velocity likely increase?

Is the decrease in velocity a result of people holding the dollars they have, trusting they are the least ugly option of maintaining purchasing power within the current paradigm?

You just touched on an excellent point that I had never considered before...that the majority of the public has never purchased physical gold, and so the process is an unknown to them.

Stores and restaurants devote great energy and resources toward demystifying the customer experience. Think McDonald's. Aside from a monthly special burger or two, the menu never changes. Many people know exactly what they will order and how much they will pay for it before even getting to the restaurant.

One shouldn't underestimate the power of inertia with regard to purchasing physical gold. Once we see the bullion vending machines popping up everywhere, though, brace for the moonshot.

A friend recently sold an apartment and was interested in knowing what she should do with the money to safeguard it. Her only thought was to "invest" it but didn't like the idea of shares and also realised that bank saving account interest didn't really cover inflation. She knew I had an interest in precious metals so asked me to "talk her through it". I explained all of the various ways that she could buy Gold and even pointed her in the direction of physical Gold. I could see that she roughly understood the concept of BullionVault and GoldMoney because to her each seemed like a type of bank with the same familiar structure of nice written balances and pieces of paper showing her account totals.When it came to physical Gold it was a completely different matter. The idea of buying Gold coins seemed OK but where was the "little piece of paper" saying how much she had? She would have nice shiny coins but her indoctrination in the "Western" system was making her unsure of actual "things" that she should store away herself. What really was the breaker for physical Gold was to her the mystification surrounding the process of selling. The thought of taking a coin and then going through the process of selling it seemed a step to far. She didn't actually express herself in these simple terms but you could sense it.

I think most people outside our little World of Gold think the same way. So don't expect the public to rush to physical metal anytime soon.Not until it's way too late.

As a full-blown FOFOA/Freegold fan, I'm somewhat ambivalent about Santa coming out of the closet with respect to Freegold. At the same time I'm both happy that this thesis is getting more recognition in the mainstream gold-bug community, but I also feel like: "Yeah, you knew about the ANOTHER/FOA writings since the start and presumably had equivalent insider knowledge, but you stayed silent, and pushed your 'angels' like 1650. I'm kinda like: Thanks for not telling all those years...!!!?!"

Thanks Jim for showing your hand at last (and for your (not to be forgotten) important and valuable writing all the preceding years), but my deepest respect goes to FO(FO(A)) for telling shit like it is from FirstPost and bringing me on the right path from the frigging start...

Thanks FOFOA. BTW, saw someone mention McDonalds in one of the other comments. Made me think of: Defend the precious! Don't make FOFOA slave at McDonalds, please!!!

Those American who follow NFL - American football, this week is championship week. Though I no longer live in North East, I will be rooting for Boston Patriots who have a 9 points betting odds over the Baltimore Ravens. I think Las Vegas wants us all to pick Ravens because of the 9 points odd and Ravens history of putting a tough fight and lead us to lose the bet.

If I know how to bet without doing online(don't want to open an online account and become addicted), I would bet on the pats because vegas wants us to take the other side.

Only my thesis that house mostly wins, but let us see how this goes. I could be wrong though.

Amen, burningfiat. An A for the Fs and something far less stellar for all those who are only now piping up, albeit in a somewhat oblique manner, in support of the physical only gold market (aka freegold) thesis.

FWIW, I agree with Vegas, the Pats are the better team. This guarantees nothing, but I think you may get better odds by waiting until halftime to make a wager. Here's the thinking:

The Ravens are a though bunch, particularly on defense, but they are also old, and they have now played two games in the postseason-last week's was a double overtime affair-and this one, against the best team they have faced so far, strands an excellent chance of representing the proverbial "bridge too far." However, the Pat's putative superiority, and The Raven's supposed fatigue, may not manifest until the second half, following a close first half. That's my 2c. I'd bet on the Ravens to cover in any case, because, the Pats are missing Gronk on the offense and Chandler Jones, who may play, is hobbling on the other side of the ball. The Ravens have no one out though clearly their leader Ray Lewis is dinged up. Go Pats

Yes, I agree that the idea of Joe Sixpack buying small quantities of PG and hiding it under the mattress until he needs some fiat is a stretch. I think businesses like GoldMoney will thrive (they already own several patents on gold digital currency). When the dust settles post-reset this type of model may be attractive to people used to online banking.

I am not looking intrinsically which team is better, or who is missing or old.

Vegas is giving Patriots 9 points favorite over Ravens. if you take that high odd and pick patriots after knowing Ravens give good fight, patriots have to outscore by 9 for you to win.

I think 80% or people won't do that, so vegas wants to funnel all bettors to pick Ravens. Since I think vegas is on the other side of the bet, we should be in their (vegas) camp and also bet on Patriots.

"Do you really believe the public will understand the nuances of physical vs paper before first succumbing to a mania for all gold, even the wrong kind? "

Good question. Good question indeed.

I am no sure because everyone now is a bubble hawk and all the bubble hawks use gold as their claim to fame. There might not be any bubbly market in gold because of this. Gold is the opposite of a bubble now. Scotts liquid gold will suffer because it has gold in its name. Because its a bubble !

" So don't expect the public to rush to physical metal anytime soon.Not until it's way too late. "

Sentiment around the people I deal with has not changed since 2010. I still get weird looks from the tellers about buying physical. I bought a 5 oz bar recently but they didn't have it in stock. So I had to come back 2 weeks later to pick it up.In those 2 weeks, the price of gold fell about $60. The teller felt so sorry for me that when I came to pick it up, she suggested that I buy online rather then at the bank so I could get my timing better.

I, for one, will be amazed if the general public find the right exit (physical gold). Who will they look to for advice if they become concerned about their savings? The same commission seeking financial advisors who steer them into stocks and bonds?

As you know VtC I have reservations about the direction of the causation in Barsky and Summers observation about the relationship between interest rates and gold. One of the things about their research that troubles me is the shifting role of gold during the 200 year period that they examined.

CHS may have stumbled upon an alternative way of viewing the correlation that suggests causation operates in the opposite direction to Barsky and Summers. If we ignore the political cycles in the treatment of gold and view it as an alternative currency in all time periods we could argue that hoarding gold and increasing gold prices is an example of the slowing velocity of money.

Enter CHS attempting to draw some conclusions about deficit spending and velocity in the snippets below:

MZM velocity topped out in the inflationary surge of the early 1980s, like M2, but unlike the other measures, it did not ascend to new heights in the 1990s or 2000s; rather, it has fallen steadily for 30 years since its 1982 top.

He provides a chart illustrating the above. He goes on to say:

The most striking feature of these charts is the complete collapse of money velocity. MZM and M2 have collapsed to historic lows, while M1 has fallen back to 1982 levels.

But I have strong reservations about this conclusion:

In this context, we can view unprecedented Federal deficit spending as a misguided attempt to compensate for the implosion of money velocity.

Re: your "I have a question about the specific meaning of a phrase quoted in a paragraph by Another;

"[Central] banks do lend gold with a reason to control price. If gold rises above its commodity price, (me: cost of production) it loses value in discount trade".

My reading of this is that "discount trade" refers to oil sold BELOW the currency price OIL would otherwise demand, in return for gold being made available to OIL at a price far lower than would otherwise be possible, without the CB leasing/intervention. Is this the correct interpretation of the phrase?

(I am reminded of the old example by Another of $30 oil plus X amount of gold, then later the same $30 plus XX amount.)"

My reading is that "discount trade" refers to the the BIS deals in physical gold at a "discount" to the "future reset price", deals that kept the really big money wanting real gold from blowing up the paper markets and the "plan" to make it to the euro's birthday party. In the 90s, the "discount price" ranged (according to ANOTHER) from $1,000 per ounce up to $6,000 per ounce. This was a big discount on the "future reset price" of $10,000 and the real future dollar price of $30,000.

Of course he may have simply meant the low commodity price of gold when he wrote "discount trade." But I put the emphasis on the word value: "…it loses value in the discount trade." The value was the control it gave the CBs in managing the Giants. The wider the gap between gold's "price" and its obvious "value" the more room the BIS had to negotiate deals that would keep the Giants happy. Here, I'll try to make my case using ANOTHER's own words! ;D

First, let's look at the deal the Saudi's cut for themselves in the early 90s which you mentioned above. Here's how ANOTHER explained it:

Date: Sat Oct 18 1997 21:04ANOTHER (THOUGHTS!) ID#60253:

The Deal:

We ( an oil state ) now value gold in trade far higher than currencies. We are willing to use gold as a partial payment for the future use of "all oil" and value it at $1,000 US. ( only a small amount of oil is in this deal ) And take a very small amount of gold out of circulation each month using its present commodity price.

If the world price can be maintained in the $300s it would be a small price for the west to pay for cheap oil and monetary stability.

The battle is now between CBs trying to keep gold in the $300s and the "others" buying it up. In effect the governments are selling gold in any form to "KEEP IT" being used as 'REAL MONEY" in oil deals! Some people know this, that is why they aren't trading it,, they are buying it.

Not all oil producers can take advantage of this deal as it is done "where noone can see". And, they know not what has happened for gold does not change in price! But I tell you, gold has been moved and it's price has changed in terms of oil! For the monthly amount to be taken off the market has changed from $10 in gold ( valued at $1,000 ) /per barrel to the current $30 in gold /per barrel still valued at $1,000! Much of this gold was in the form of deals in London to launder its movement. Because of some Asians, these deals are no longer being rolled over as paper!

First of all, they said they valued gold at $1,000/oz. in this deal and took $10 worth of physical off the market per barrel for a "small amount of oil." This was in the early days of the deal (c.1991). $10 is 1/100th of $1,000 so they were taking 1/100th of an ounce per barrel. In the early 90s the Saudis were producing about 9 million barrels per day. ANOTHER said that starting in 1991 they were taking about 20 million ounces of gold per year off the market through this deal. 20M ounces X 100 = 2 billion barrels of oil per year. Divide that by 365 days and it looks like the "small amount of oil in this deal" was 5.5M barrels per day, or about 61% of their production.

20 million ounces at $360/ounce would have cost $7.2B. At $1,000/ounce it would have cost $20B. 3.3B bbls of oil sold at $30/bbl would have brought in $100B per year. So let's say that they came to the negotiating table in 1991 saying that 20% of their production was "net-production" or surplus for which they needed a real wealth reserve (gold) in return.

There were two options on the table. To use ANOTHER's first example, they could lower the dollar price of oil from $30 to $25, but also price oil in gold at 1/400th of an ounce per barrel. Here's how ANOTHER put it:

What if the oil states offered to buy gold with oil, OUTRIGHT? No currencies involved. " We will produce flat out, all the oil you want. And, we offer this oil as payment, per barrel, to buy ( say? ) 25US dollars or gold priced by us, at ( say? ) $10,000oz.!"

The answer is very simple, the world would sell them gold for oil. I tell you now, this almost happened!

If that had happened, as ANOTHER said, anyone with gold would have gotten oil really cheap. And the gold arb would have immediately taken gold to $10,000 per ounce. The Saudis could easily exchange gold to cover their overhead costs and save their 20% excess without a problem. The problem for the CBs would be that the world would be off a fiat standard and back on a gold standard a decade before the euro birthday.

The other option on the table was, let's not rock the boat just yet. At $30/bbl, you want to save about $20B in gold each year. At current prices that would be 50 million ounces or 1,555 tonnes per year. But you saw what happened in the late 70s. Obviously you can't just go to the market and get that much—in other words, obviously the price of gold today is bullshit. Obviously it's going to have to reset at a much higher level someday, we'd just prefer that day not be today.

So let's see if we can figure out a way for you to take, say, 20M ounces, or 622 tonnes per year off the market as long as we can keep the price of gold low so as not to rock the fiat currency boat. We'll even underwrite (guarantee) this deal with our own gold (and we have lots of it!). From what you, the Saudis, obviously understand, this is an excellent deal for both of us, especially if the gold you get comes from someone else and not from our vaults. But either way you're covered. Deal done!

I guess we will never know the exact deal, but ANOTHER sure spilled a lot of details in his early posts if you look closely!

I noticed a story about the sale of Silver Eagles being suspended. Rather than thinking there is an actual shortage of Silver doesn't this seem to hint at Silver acting just like another commodity?Most modern day commodities operate on the "just in time" principal so that the price doesn't fluctuate too much or the suppliers having to carry too much stock. Sometimes this can lead to momentary over or under supply.All the headlines from the Silver internet sites that shout "Silver has run out" seem to me to be wishful thinking.

"As long as there is an open market for gold, it will not be allowed to trade above its commodity price! It has far too much value for that to happen. You see, in much the same way that a zero coupon bond trades at a discount to face, gold is traded for its discount of "money value to commodity price! Think that I a fool, because I trade gold for thousands US an oz.? You will think much on this in the future.

[…]

With gold discounted to its production cost and below, those that have it can trade it for its monetary value. Make no mistake, the BIS knows gold in the many thousands. The future "reset value" of gold is the key. "support the dollar with oil and the currency system works" "fail the currencies and the dollar will come off the oil standard and the BIS will reset gold to $10,000+ with many conditions. That is why they continue to accept the dollar as a reserve. If Japan or any other COUNTRY sells US treasury debt it's all over!"

[…]

The selling of old dollar reserves, alone will reprice gold in US$ terms of at least $6,000/oz! Its present interbank reserve value.

[…]

The $6,000 valuation of gold can only be true if currency deflation destroys enough dollars to bring it down to that range. Without deflation, the dollar will be devalued much lower than this (higher gold price)! Once the Euro is created and begins to effect world trade (late 1999 perhaps), the gold market will begin a transition as never before! I think it will be interesting to follow the politics of this change, yes?

[…]

When the battle to keep gold from devaluing oil ( in direct gold for oil terms ) is lost, the dollar will find "no problem" with $30,000 gold, as it will be seen as a "benefit for all" and "why did noone see this sooner"?

[…]

The true value of gold, as a monetary currency, in today's current US$ values, is over $30,000. If all currencies were destroyed, and gold only was used, this value would be higher. However, currencies will be used in the future, as today, only their value in trade will change. They will no longer be held as reserves, without gold at their side!

Okay, so if you've got really big money and you want to protect a large portion of it in physical gold, you've got to pay what to us shrimps would be a big premium. But to the true Giant it is actually a discount.

Imagine, Woland, that you woke up one day and discovered that you owned an oil field that would produce millions of barrels a day for the rest of your life. Would you consider that a windfall? In fact, that's exactly what it is. And with that windfall you will be able to raise your standard of living up to the greatest standard available to mankind in 2013. You will even be able to accumulate wealth on top of your unlimited "maximum consumption" binge. What a rare treat!

But what you won't be able to do is get the full windfall profit from moving your excess into physical gold that we shrimps can get. You already got your windfall. You simply have too much money to do what we're doing. If you tried to go "all in", you alone would drive the price so high that you'd never get the windfall you were after. Go ahead, try. Approach your local Bullion Bank and see how far you get. I bet you'll eventually find yourself in a private room somewhere in London receiving an education and an offer. What seemed like a huge premium when you walked in will feel like a big discount by the time you leave.

When ANOTHER used terms like discount (and even premium) in this context, I think he was usually referring to gold, and I don't think he was talking about the 10% and 20% premiums and discounts we shrimps are used to. I think he was talking about Freegold-sized premiums and discounts. Remember this fellow from the post?

"A proposal was offered to borrow in broken lots, 3.5 and 5.5 million ozs for resale. It was turned down. The owner offered to sell only, no lease. What turned heads was that someone else stepped in and took it all, at a premium!"

I wonder what premium he got. That's the same 9,000,000 ounces I mentioned later in the post converting it to 280 tonnes. Remember ANOTHER saying:

"Think that I a fool, because I trade gold for thousands US an oz.? You will think much on this in the future."

Think now! I wonder if this guy got "thousands US an oz." when he was expecting $310/ounce. Let's see, that was a $2.8B sale offer at $310. At $1,000 it would have been $9B. Yeah, I guess that would turn some heads.

Woland, have you noticed that in ANOTHER (THOUGHTS!) there are many times when ANOTHER gives brief replies to various people yet we don't always know the question that was asked or the context in which it was asked? Well, I added the link to the old Kitco archives to my list of links in the sidebar. It's called Early Kitco Forum Archive.

It's pretty easy to click over and find the comments associated with ANOTHER's answers, and I think it adds a new dimension to (THOUGHTS!). For example, here's a discussion about that 9 million ounce deal, but you wouldn't have known that's what it was about from reading only ANOTHER's side of the conversation. I included a little more of the discussion for additional context (and also just because it was interesting), so enjoy!

So, this long comment continues, but new page numbers will start below because I thought that 2/7 might be a little too intimidating at the top. ;D

Is there any way to find out if the 9,000,000 oz. deal really happened?

Where might the trade have taken place?

Is this whole gold trading business really that much "cloak and dagger"?

Date: Fri Dec 12 1997 22:31ANOTHER (THOUGHTS!) ID#60253:

SW, What is "cloak and dagger"?

Date: Fri Dec 12 1997 22:54sweat (ANOTHER) ID#23782:

"Cloak and dagger" is an expression I would use for an action ( or trade ) done in great secracy.

My experience as a trader has taught me to value such things as a ) time and sales - as reported on various exchanges b ) open interest - as reported on various exchanges

The market always moves to size, you spoke of "making the turn". I would love to see documentation of a trade that size.

No offence intended, of course.

Date: Fri Dec 12 1997 23:08ANOTHER (THOUGHTS!) ID#60253:

SWEAT: You will not see 80% or more of gold deals. If it was done with all to see the discount value would be lost as the world price would explode. This is not the relm of any public “wall street”. At one time it belonged mostly to the Barron. Now it is large with the BIS and super rich. Wars will be fought over the lack of “visibility” of these dealings.

Date: Sat Jan 10 1998 21:50sweat (ANOTHER) ID#23782:

What quantity of GOLD, paper or physical, has OIL traditionally purchased on an annual basis? How much paper GOLD is out there ready to be squeezed? Do you think OIL will be able to collect what is owed to them?

Date: Sat Jan 10 1998 23:13Cmax (COMEX is only but a refernence to the value of paper gold, NOT physical.) ID#344205:

It is interesting to watch all these various reasons for gold’s fall…..but most are missing the REAL issue.

The fact is, that when we talk about the purchase of gold, we are really talking about two divergent things: a. that of the physical metal……… ( money ) b. that of a paper derivative, an I.O.U., kind of like a dollar bill…… ( currency )

What ( and who ) determines the price every day of the gold market?

Obviously, everyone looks first to COMEX as a reference before adjusting their prices.

One point must be plainly put forward: Gold contracts, no matter what they are printed on or HOW they are worded, they are merely DEBTS, nothing more than a simple I.O.U. There is nowhere near enough gold on the planet to satisfy all these I.O.U.’s ( debts ) that are outstanding…….. and they are the very antithesis of what acumulators ( hoarders ) of wealth find in the spirit of holding real gold ( money ) .

I find it so wildly insane that holders of physical gold, ( money ) , would allow their wealth to be sold ( or valued ) at a price that is established by the supply of FIAT gold. If this scenario was written into a novel, no one would believe it……. or one would read it only as a comedy.

ANOTHER said it quite well, in his comment that “there is no end to the amount of paper gold that can be created.” All of this FIAT supply has overwhelmed the REAL demand for physical, and most people believe that they REALLY have purchased gold, when they buy these contracts. As long as the majority of gold purchasers believe that their paper is as “real” as physical, the COMEX paper gold value reference will continue to drop.

I for one, no longer accept established paper gold values for the real value of gold. Just try and buy a substantial quantity of the yellow……and what do you see? 6 months ago, you could buy at spot. Today, one ounce coins have a premium of $14 over spot….and rising every day. Oh, and don’t forget that even when paying the “premiums”, one has to really work at finding the coins for delivery. Easier said, there is now a phenominal demand, but very little supply of physical. And yet we allow paper to determine gold prices. Gold has never had the brute demand as what we have today……yet we are told that prices are down due to lack of interest.

COMEX should now be looked upon as the animal that it really is…… A REFERENCE TO THE VALUE OF PAPER GOLD. It has nothing to do with the price of physical beyond suckering in the few ignorant to sell there physical for the price of paper.

SWEAT: What quantity of GOLD, paper or physical, has OIL traditionally purchased on an annual basis? From 1991, appx. 20m/oz./yr., now it is more.

How much paper GOLD is out there ready to be squeezed? Over 14,000 tons.

Do you think OIL will be able to collect what is owed to them? It will come outright or thru the increase in value of metal owned after an oil for gold bid.

Date: Wed Feb 04 1998 20:09kuston (followups) ID#273227:

Another - Did I misunderstand you posts last year? When you were promoting your gold theory last year - you stated silver and platinum would crash along with paper. I remember specifically asking this question just before I made a large physical purchase. Today, you are promoting world wealth will go into all physicals. I ask only for personal reasons. My physical collection has been going on for a long time, that's how I found Kitco many many months ago.

Date: Wed Feb 04 1998 20:04sweat (ANOTHER) ID#23782:

Is it still possible that OIL will make a bid outside the BIS? If so, where might one look to follow this drama? How has the collection of physical progressed? Kitcoites have surmised RBA's 167 tonnes went to China or South Korea. ( Korean collection of 161 tonnes looks suspicious ) Any comments?

Date: Wed Feb 04 1998 23:23 ANOTHER (THOUGHTS!) ID#60254:

REPLYS:

Mr. Sweat, If oil or the BIS bid for gold, you will know it ! In your terms,

" up front and personal"??

RBA's 167 tonnes ? No comment.

Mr. Kuston, Please understand, that wealth will move into all forms of real assets as the destruction of our debt/ digitial currency system continues. When the currencies move to a final resolution, it will be the "marketplace for precious metals" that will die first! It is well known that gold will hold it's value above everything. All other metals could lose much of the value they gained prior to this meltdown! Remember, "when the currencies go to nuclear war, all paper and paper markets will burn"! Many hard assets will lose in the public mind as confusion will rule. In the thoughts of many, gold will perform!

A little detail : since ANOTHER does not understand the expression CLOAK and DAGGER which is used in one of the conversations FOFOA posts in the comments, Another cannot be English.. otherwise he would have grasped the meaning of that expression..

"So, since I'm being HUGELY conservative and projecting a ZERO percent demand increase month over month on only HALF of this month's demand to date ... hows THAT for an EXPANSION of the flow rate ?? "

And let's consider the denizens of the island of Nippon who, if Kyle Bass is correct, should, within 18 to 24 months, be looking, quite feverishly, to safeguard their yen denominated savings. Now, they, too, may have something of a conceptual hurdle to climb, and, to some extent, a logistical one, where acquiring physical gold is concerned, but, there is, arguably, considerable potential there for shrimps to roil the seas.

Thank you so much for that outstanding and comprehensive response. It leaves me with only a few, rather minor pointswhich remain unclear, one of which I will mention in a moment.

I must say that I was disappointed that you chose to reveal the information regarding the oil field. I had assumed, whenwe spoke of it, that that was to be in strict confidence. Now,when I come to Las Vegas, I doubt that I will be able to inter-act as freely with others as I would have liked, and will likely be bombarded with questions from the attendees. Che sera sera. "1. Regarding the comparison between gold and the zerocoupon bond: In the case of the bond, there is the discountto par at issuance, and the yield is the gain between that priceand the par value at the Date of Maturity - the time event isa "known". In the case of gold, the "par value" is the true value of gold as seen by those giants who hold it as wealth,and whose position can (theoretically) dictate its price in oilterms. (It could also be seen as the value to be "revealed" ifthe current global reserve asset, whether US$ or all fiatcurrencies, were to fail) However, in the case of gold, the "Date of Maturity" is in fact an open question, by virtue of its being a POLITICAL event of the greatest magnitude. In order for the analogy to truly hold, EITHER the "political will" of the losers,(for there will be many) must be overwhelmed by that of those who will gain, (whereby, all major economies have atleast 15% or total reserves in gold), OR, a natural, systemic collapse of the US$ must occur first. Since I see we have some serious super bowl handicappersin this thread, I'll leave that one up to them.

Going back to your question about gold derivatives, don't you think the hybrid price of gold (which we see) mimics the price of the derivative, and not the other way around? As FOFOA says, the derivatives exist to hide the truth.

As for political will, whose matters more, the borrower or the lender?

You see, the dollar is going to fail now because a good alternative is available now. All this has something to do with the coming new gold valuation, but that new price level is not related so much to gold backing a currency again. (more on that in a min). The dollar is toast because most of the world doesn't like the management policy. They didn't like it in 71, but tolerated it because gold was supposed to keep flowing in repatriation payments. And if they didn't like it back then, they god awful hate it now!

We like to think that the dollar is what it is because we are so good. (smile) But the truth is that for over a two decade period +, none of our economic policy, our trade financing policy, our defense policy or our internal lifestyle policy has pleased anyone outside these borders. We managed the dollar for us (U.S.) and the rest could just follow along.

Our fiat currency has survived all these years because others have supported our dollar flow in a way that kept it from crashing its exchange rate. We talk and think like we are winning the tug-of-war when, in fact, they just aren't pulling to hard. Waiting for their own system to form up.

FOFOA: People see the "paper gold market" working today and so they think that it can work all the way up. Like we'll go from $2,000 to $3,000 to $4,000 and so on all the way up to $55K. They think that as the pool of new buyers flood into today's "gold" the shorts (or the bullion banks) will simply have to cover their exposure and bid for any physical they need until the price gets high enough for them to get it.

In many ways today's "gold" does need an expanding pool of buyers. But here's the main difference between OG's stocks and physical gold. From my 2010 backwardation post:

Dollars bidding on MSFT stock set the value of that stock. If dollars are frantically bidding on MSFT (high velocity), the stock skyrockets. If dollars stop bidding for MSFT all at once (low velocity), the price falls to zero. This is true for everything in the world **except gold**.

Gold bids for dollars. If gold stops bidding for dollars (low gold velocity), the price (in gold) of a dollar falls to zero.

...

So now we've got all these homeless savers that will need to choose between stocks and gold (or else sit tight in bonds waiting to be sheared like either the Greek debt holders or Zimbabwe pensioners). This bunch is NEVER going to choose today's "gold" (the $PoG) en masse. They will likely end up splitting the difference and going 50/50 in stocks and bonds (or cash) while a few put 5% in GLD.

So what I don't foresee is a stampede by those homeless savers into today's "gold". There may well be another mini-stampede like we had in August, but it will display many characteristics of a bubble, including the volatility and the downside, which savers don't like. Savers aren't looking for the next XX-bagger and they don't like beta, so they are a hard sell for both OG and the $PoG. Savers simply want a nonfluctuating asset… preferably in real terms.

As I said (because ANOTHER taught me), "Gold bids for dollars. If gold stops bidding for dollars (low gold velocity), the price (in gold) of a dollar falls to zero." So you see, there doesn't need to be a stampede into today's "gold" for real, physical gold to become "priceless". ANOTHER wrote, "Gold! It is the only medium that currencies do not "move thru". It is the only Money that cannot be valued by currencies. It is gold that denominates currency. It is to say "gold moves thru paper currencies"."

So now I'm looking only at physical gold **IN SIZE**, the kind of size that represents entities that know WHY they are holding gold (i.e., not for paper profits). And I'm wondering when physical gold will stop moving through paper currencies, at least at parity with today's "gold", the $PoG. And I think that will probably happen when the $PoG goes too low.

"But if you are going to buy gold it has to be gold you can trust and get your hands on. First, it has to be gold bullion investment (or coins) not "paper" gold (the paper gold market having long since grown detached from the bullion it supposedly represents)."

I thought some people here might find the phrase "long since grown detached" amusing, in more senses than one.

"Dollars bidding on MSFT stock set the value of that stock. If dollars are frantically bidding on MSFT (high velocity), the stock skyrockets. If dollars stop bidding for MSFT all at once (low velocity), the price falls to zero. This is true for everything in the world **except gold**.

Gold bids for dollars. If gold stops bidding for dollars (low gold velocity), the price (in gold) of a dollar falls to zero."

This seems to me to be a false dichotomy, simply emphasising one or other side of the trade. Surely every transaction includes both a bid and an offer, so a sale of gold for dollars must involve a bid for dollars in gold and a bid for gold in dollars. It also seems to me that if there were actually no bids for gold in dollars then the price of gold in dollars would indeed be zero. Not of course if there were no bids in the opposite direction; then it would be infinity.

I have seen this mentioned lots of times and have never understood the distinction, since I always see two side in every trade.

I am not trying to be contrary; I genuinely don't get this distinction.

I rarely watch TV but I happened to see parts of the History channel on the Presidents. I note that long before the exorbitant privilege was bestowed upon the USA we were able to assemble a huge navy, build the Panama canal, and feed good parts of the world. Of course now we mostly manage their money as (40%?) a good deal of our economy is 'finance'. Most of this will likely go away when the dollar collapses. Still, I wonder if the country will not be able to return to some status as a major player. Clearly all our international adventures will have to be financed with more that easily conjured dollars, but still I'd have to guess that we will probably try to remain a major player. I suspect our level of influence will be roughly that which we had at the time of Teddy Roosevelt. It was before the Fed so whatever we had was based on real wealth.BTW the series on the Presidents had a seriously liberal bias. At no point was the influence of the Fed ever mentioned as a cause of the Great Depression. nope...it was all mismanagement by the Republicans...and lack of regulation. To the producers that 'lazy fairy' stuff just didn't work.

I think a careful reading of my statement regarding the relation between "gold units" as you called them, and my term, "synthetic"gold, will show that we agree that both are designed to MIMICthe "futures determined price" of gold, which you refer to as thederivative. So yes, any "small scale" open market physical whichchanges hands follows that price. The futures (derivatives)market leads.

Where we may differ is with respect to your second question;"As for the political will, whose matters more, the borrower orthe lender?" I'm not trying to be facetious, but let me pose the question in a different way;

1. I borrow $1000 dollars from the "Mafia". If I can't pay, I havea problem. (injury, or other)

2. I lend $1000 to a mobster, and he won't pay me back. I STILL have a problem. My $1000. (so it matters to WHOM you lend)

3. The Policeman's Benevolent Fund makes a loan to the "Mafia",and they wont pay it back. Then, maybe the "Mafia" has a problem.(the size and power of the respective parties matters)

I think Ender said some time ago (you may disagree) that no single nation would stand against the dollar. My personal opinion is that, only when the largest possible number of important economies / nation states are prepared, (by having sufficient gold reserves) to withstand the transition, would atrigger be pulled, as in bidding openly for gold. I would expecta more likely trigger would be an endogenous, spontaneous event, in all likelihood originating in the banking system, andpossibly involving the currency or interest rate swaps market. Ihave no special knowledge to back that - it's just what I think.

Many thanks, I doubt Jeff would mind. I have read it several times before, just forgot that it came from there. In that novel sense it is not apposite to the kind of real world exchange I had in mind, but of course the point has its own different context. Alles klar.

Hi, Fofoa, I find your interpretation of the use of "value" completelyconvincing. Also, is it your interpretation that the "physical" whichBig Trader was buying up in Hong Kong was in fact mine forwardhedges, and that it was the threatened "short circuit" of the pathfrom the mines to OIL via these hedges (with the BIS and a merchantor bullion bank in between) that the BIS had to stop? It was neverfully clear to me exactly what Another meant by physical in that1997 context.

This is very believable yet fictitious scenario though brings to mind a few questions for the subset of FOFOA shrimps that believe they only need to hold gold and no other SoV.

First I agree 100% that gold not silver and/or other lesser forms of SoV will be the focus of giants during the great currency reboot. Further the price per oz in fiat could be approximated by simply dividing the units of currency that remain after the deflationary collapse by the ‘physical’ gold ‘within’ the currency union.

I also believe the ‘gold’ must flow part of FreeGold as well for international settlement of currency surplus between currency zones ‘at’ the local prices above, post reboot. After the reboot no country will trust anyone else and for good reason. Basically a medieval fair at a global level.

My concern is two fold and comes from a deep seated fear of being a shrimp vs. a giant.

First I believe that the impending deflation of paper assets convertible into physical currency at present will not be equally shared between the shrimps and giants. Basically our 401K, IRA, imploded while the Warren Buffets and JP Morgans are somehow made whole, via more public debt on the shrimps if needs be.

The upshot is that ‘all’ net producers ‘paper’ is effectively stolen the world over in order to protect the 0.01% at one end and the parasites that keep them in power at the other end (i.e. Obama Phone lady).

Thus the price per oz can’t be determined based on the existing IOUs but on a much smaller subset that will still remain after the deflationary collapse. This will be the same problem for the Euro IOUs vs. cash BTW. Which is why Euro bonds are no better than US bonds. Physical cash only please if your not smart enough to hold gold, even in the Euro zone.

Giant think; why use our ‘paper’ resources to keep civil order when you can use the net producers shrimps ‘paper’ resources instead to eliminate a serious amount of the excess IOUs relative to physical stuff out their. Besides you need to get those net producers moving again to replenish the paper wealth they thought they had in the system free and clear.

This leads into the second fear; moving from ‘shrimp’ paper to ‘shrimp’ gold.

What is the motive for giants of allowing the few shrimps smart enough to hold physical gold (ie us FOFOA-ites) the privilege of enjoying such a spectacular increase in purchasing power?

Why not do a FDR and force the sale of shrimp physical at say $10,000/oz (minus capital gains of course, thank you very much) and then use this ill gotten physical for international trade settlement at $50,000/oz?

Basically as a gold shrimp you’ll be forced to either sit on the gold (i.e. have a boating accident and/or a very poor memory) or break the law in an attempt to smuggle/launder it into the 50K/oz capital gains free system of the giants somehow.

While the same giant crack down could also happen to silver, the low above ground stock to industrial flow ratio and its criticality for electronics may force the giants to allow it to freely flow for us poor shrimps while gold is locked tight for the same.

As I have said before gold’s greatest strength is ‘also’ its greatest weakness ‘namely’ it is everywhere a creature of the giants. A giant by definition could care less about us poor shrimp beyond maintaining the social order necessary to keep them in power and protect their wealth. Think French revolution.

I believe an argument against the kind of crackdown on shrimp gold holdings that you fear is that the governments will need gold to flow in order for their fiat currencies to be accepted around the world. And most of that flow will need to be private citizens selling/buying gold. Someone overseas who holds dollars and wants gold needs to be able to exchange dollars for gold. If U.S. citizens are able to freely exchange gold for dollars and vice versa without tax penalties or windfall profits penalties, then they will be willing to do so and the gold will flow. If the U.S. government tries to discourage U.S. citizens from holding gold through taxes, fines, and imprisonment, the citizens will tuck their gold away in their dresser drawers and it will not flow. Then the only source of flow would be the central bank.

I believe Singapore implemented some sort of tax on gold transactions in the last couple years and then had to get rid of it again. Gold will not flow to places where owning it is penalized.

http://www.jsmineset.com/2009/01/08/rentenmarc-to-the-rentendollar/http://www.jsmineset.com/2012/02/14/gold-heading-back-towards-a-monetary-system-not-away/Two of Jim Sinclair's numerous, ongoing formulations and predictions of gold monetization or reformulation, reevaluation (see his monikers) amidst changing global capabilities.In many examples (only two above), he takes slightly different perspectives or approaches. As I follow his works daily, he is periodically reiterating and reassuring he has hasn't changed his expectatations. Lately it takes the form of merely endorsing a study or chart from someone else, evoking gold's future value or relation to another market, or adding commentary to essays or linked news.

To help you understand Freegold concepts try reading The Gold Must Flow. Here is a sample from FOFOA.

The Gold Must Flow

"The bottom line is that private gold needs to flow as a fertile member of the balance of trade. There will be no advantage for the USG to confiscate or tax above-ground gold this time. Gold may be utterly "useless" to the present debt-based economy, but it will be absolutely vital in the Freegold economy. (Here's a comment I wrote last April about the importance of privately held gold.) This seems incomprehensible when viewed from within the current paradigm which is why you must try to put yourself in the next one to see what I'm talking about. I can try to help you see what I see. It's not easy to explain, but I'll certainly give it a valiant effort once again.

Here's the way to look at it. Today the US is running a trade deficit of 21%. We import $2.34T worth of goods and services but we only export $1.84T for a deficit of $500B or 21%. What this means is that we pay for only 79% of our imports with goods and services in return. The other 21% we borrow and then consume. Every day, every month, every year, we are borrowing and then consuming 21% of our imports. And even though the private sector has cut back on its consumption since 2008, government sponsored consumption has increased so the total hasn't changed much. And 21% is about the average for the last 30 years.

All those goods and services that we borrowed and consumed for decades on end can never be paid back. And they never will be paid back. This is a certainty. But that doesn't mean it will continue. And that's what this paradigm shift is all about. That's why the Superorganism is revaluing physical gold. So that the gold can flow along with all the other goods and services in payment for imports."

Re: My links from jsmineset.comJim is using hypothetical numbers, not price predictions in the two examples. Jim is explaining what will probably happen should gold reach a fixed point- he arbitrarily chooses $1650 and $4500 in his examples- of relative stability.His price expectations have grown to where the last few years he expects "Alf Field's numbers", which he admits have also grown. They both have stated in one way or other, they expect POG to be at %10,000 or higher and several times have said or implied agreement with $12,000 or higher, becoming more reticent (though not backtracking)in the last consolidation, as other predictive analysts and commentors, traders, brokers, advocates, consultants etc. also refrain from customary traditional year-end and periodic outlooks and interviews. Calm before storm indications in barometric and wave pressure maybe of tsunami proportions.Jim Sinclair was one of those publishing a gold chart study done by Nick Laird and his partner at Sharelynx.com this month, graphing gold's rise back in time through today and exhibiting exponential and mathematical attributes of interest. If you saw the charts you would see POG projected well into 6 figures.- Until next time, Mikal

P.S. Initially, Jim and Alf (Jim also follows Trader Dan Norcini, Trader Kenny Adams, Harry Schultz and Ira Harris)were not talking 10 or 12 thousand dollars, but lower numbers. This is how the two evolved over the last decade.

byiamyoung:Yes that inertia is a very big factor. When I realized that I had to buy gold it took me nearly a month to find out how best to invest in gold :-). I had nobody to help me, but thankfully in India there are a lot of jewelers.

Also at that time I did not know about the 30x revaluation, I was just trying to save my money, otherwise I would not have bought 100gm bars. Now I buy exclusively 10gms and have bought a few combibars.

Glad you enjoyed my fairy tale. I think you are conflating your conspiracies though - the intelligence/military/politician class has one set of levers and priorities, while the oil producers/landed/financier families has another. Henry VIII was not Lombardi, nor was Wellington Rothschild, nor are the Saudis Bush.

What is the glue that holds them together? The legal and political system, and the trickle down favours (the rise of Tony Blair). Each has its own vulnerabilities. Giants do not always make the rules.

A paper currency derives its value through consensus, among trading partners at every level from employer/employee to consumer/grocer to international commerce.

At the outset, all agree this paper (say $100.00) represents a fair number of hours of work or things to buy, relative to minor differences, everywhere.

In this way, the paper mimicks gold, which has enjoyed consensus support for millenium. It has done so by remaining honest and restable for honesty and purity by the assayer.

But how do we assay paper? By CONSENSUS support.

Today support for the dollar is based more upon transactional utility than by it's honest measure of value.

Therefore it's support is declining as the consensus breaks down.

There is never a disagreement among the consensus, about what 999 pure gold represents. It is refinable, assayable, unquestionable.

The Euro on the other hand, aims to be true to gold, though I fear for its politcal perception among the masses.

For those who study the complexities of the top of the gold pyramid (the realm of official support) may believe that the center section of investment holds allure for many shrimple.

But IMO this section is illusory, and far too adulturated with paper gold. How many institutional investors take delivery of bullion? Less than 3% or the entire section collapses. Retail investors in physical gold? Rhese only truly eiists at the massive base of the pyramid, or the "physical plane".

The largest common denominator of the masses is IQ. Do not underestimate the enormity of a simple idea that all agree upon.

The shrimple do not know how to buy gold? I will tell you that most do not know how to buy paper gold--they do not even know it exists.

But they do know how to use Google. And by simply typing in "How and where to buy gold" millions will be rewarded with 176,000 ways to buy gold every 15 days ;0)

So to acknowledge the value of these discussions of support for the dollar, as well as the simplicity of the thoughts of another, I would add one bit of spice, "consensus support" and I would add that in simplest terms, the lowest IQ denominator, the masses understand two things, GUNS and GOLD.

because simple people all over the world understand that disagreements about how we "ssay the paper" to keep it fair and honest have always ended up being settled by GUNS or GOLD.

You see the basis of this simple consensus support in the record breaking support for guns and (physical) gold.

And that is the beauty of Another. He spoke in terms that the shrimple could understand.

We do not know what will cause consensus rejection of the dollar at the top of the gold pyramid, but if the bottom syops supporting it - to the amazement of the top and middle - game over.

When it comes to consensus support, the weight of masses will overwhelm the power of central management.

Then it will be up to them to decide whether guns or gold will settle debt.

I look at Nick Laird's updated chart every few days. http://www.sharelynx.com/chartstemp/GoldeWave.php That's one hell of an angel at W5(1). We get there and that chart's going viral. I recall Nick sparring with one of our mentors in the early days. Weren't you around back then? Your sign-off rings a bell.

I tend to think if FG were to happen, it will be partially market-driven (whatever that really means - appearance being what it is) and then the final conclave of the giants.

I'm still checking premises via Prechter, Ian Gordon, et.al., just to challenge confirmation bias, and could make the argument either way. Deflation first, shake out the weak pocket change, then lift-off to recapitalize the superorganism.

In truth, most of us are just looking at shadows on the cave walls. If we knew how this world really worked, we'd want to be on the first spaceship outta here ;-}

You are probably right that Google will be a common pathway for lots of newbies to approach gold (both physical and paper)... once they break free from the inertia that keeps them from making any decision at all about protecting their savings (if they even have any).

Most people I know worry about getting to work on time, washing their car and getting a haircut, what to eat, and so on.

They care about sports teams and tv shows. If they watch news at all, they blankly accept the oversimplified and usually wrong versions of the issues that the talking heads yammer about (before they move on to more pressing pop culture stories).

For most, the path of least resistance is the path followed. Viewed from that mindset, gold is radical...extreme...risky. Nevermind the facts. Facts are messy. And Shark Tank is on in 30 minutes, so there's no time to consider facts.

For most (at least in the West) who have 401ks, they know nothing about where their money is invested. The prospectus brochures that come to them in the mail are mind-numbing, and all sound like very sensible funds. Some may care that the funds are green (whatever that means). Only the very driven actually read about their invested savings.

You say "The largest common denominator of the masses is IQ."

I think the largest common denominator is lethargy. However, when gas suddenly hits $10.00 a gallon, and then $25.00 a gallon the next month, then everyone will be paying attention.

That was a stumbling block for a lot of folks, and may still be, but it has an analogy in the world of electronics that simplifies it.

Circuit-board design engineers think in terms of "hole flow", and technicians visualize and troubleshoot in terms of "electron flow". Same difference really. Just a matter of perspective. Which came first? Holes (positive charge) or electons moving out of those holes (negative charge)? Does it matter? (pun intended). Neither would occur without hooking the whole shebang up to a power source. Think BIS - $55K standing bid (potential energy) - shit starts "flowing" - both directions.

I noticed you linked Cliff. I think you read George as well. Did you see his Friday column on devaluation of the $?

What do you think of that?

I started reading George over 10 years ago now I think. All that time and I don't ever recall him touching on FG at all. I emailed him Friday (no response) and asked how could they stop on 30% and better yet, what would the reaction be from the rest of the world (savers) if this happened? Wouldn't the privilege end right there?

Hmm... As a circuit board design engineer I can say that I think in current (Amperes). By old convention Amps flows in the same direction as the "holes" (positive charge), electrons (the actual charge carriers) happens to flow in the opposite direction, as you also say. To answer your question: It doesn't matter.

I like FOFOA and Aquilus' simply observation. What happens at the limit? Where is value residing at some flow (lim->0)?Ergo, if currency and gold can no longer be exchanged at some point in time, does that mean gold is worthless or that this particular currency is worthless? The only sane answer looking at things from a giant-perspective or from a perspective of 5000 years of history is given by default...If gold and currency X can't be exchanged no longer the obvious conclusion from the perspective of any sane observer must be: Surplus making producers no longer seem to transact in currency X. They must now use some other medium of exchange. Currency X is apparently of no use if I want to buy anything from these producers.

The alternative conclusion to be drawn is: There are no longer any surplus producers! Let's just say: I'm not going there!Therefore Gold always flows through currencies/denominates currencies, and _not_ the other way around.

hi burningfiat, works for me! For us shrimps though, who aren't working on multi-generational wealth, it's kind of a moot point, other than the reset-value association. We're going to be using the opposite flow, even if FG doesn't pan out. The currency du jour flowing through our gold, through our hands, and through whatever it is we purchase. I'm gonna keep a FG wrist-strap handy, just in case, and try to stay grounded ;-o

Check out the subliminals in this Fox News report at :56, 1:12, 1:30, 1:41

Just don't tie that yellow wrist-strap too tight! It's been know to restrict blood circulation in some instances!!! ;)I agree that we shrimps have a different time horizon in mind than the giants (unless we strive to become giants ourselves?). All the more reason to grok their mindset and take advantage of the fuckers in this revaluation!

This may have been resolved, but up thread was a discussion about dollars bidding for gold versus gold bidding for dolloars. My perhaps simplistic take on the difference is that ultimately people exchange stuff for stuff, and dollars are only an intermediary. Most importantly, most countries don't need or want dollars, they want the things that dollars can buy (most especially oil, if you want a supertanker of oil, you have to pay in US$).

The dollar has value only as future oil/stuff, and the guys who have the oil (gulf) or stuff (china) want gold. In a post freegold world, and perhaps even today behind the scenes, gold is the currency behind the currencies. So if there are no trades between gold and dollars, it is because one of them is worthless. And it will not be gold.

It took me a while to really "get" the "gold values currencies" thing.

The easiest way for me to think about it is to frame it in terms of some other good. For example, a gallon of milk. At the grocery store, I see a gallon of milk, priced in dollars. When I buy the milk, I exchange dollars for milk, but there's someone of the other side of that transaction too. The grocery store buys my dollars with their gallon of milk. So can you make the argument that "milk bids for dollars" or "milk values dollars" as well as "dollars value milk"?

No. The reason, is because dollars value much more than milk. It's not correct to think that milk is the primary consumable good which currencies are measured against. You can measure the value of milk in terms of dollars, but not the other way around. If you want to go the other way, to measure the value of a dollar, you have to use a basket of consumable goods, not a single good like milk.

So the value of any one consumable good can be measured by currency, but currency can't be measured by a single consumable good, it takes a basket of consumable goods to do that. Since there's an infinite combination of different baskets of goods that one can use, it's not easy to measure in this direction.

In this scenario, you can move up a level, and replace consumable goods with currency, and replace currency with gold. Gold can value any single currency, but no single currency values gold. You could argue that gold can be valued by a broad basket of currencies, but you can't directly set a price in this direction, because of the multitude of valid currency baskets to choose. It's easier, and more correct, to think about gold valuing currency.

Gold bids for dollars, just as currency bids for milk. Not the other way around.

byiamBYoung,A good point you make, the extent of "investing " to the largest number of shrimp in the working class is a 401K they don't understand, and never even attempt to modify on line (to the extent that they can) in order to adjust to changing market conditions.

In 2008 when I became "aroused" from my bear den slumber, I made adjustments and beat all indices, including the Russel 2000 in 09 and 10, netting about 27-32% net gain respectively.

Then I got myself an early out and took 75% of this easy play money and bought guess what??

How many other will do this, either by design or by circumstance ??

Not too many I suspect, but I rest easy in the notion that if half the working class did this, GAME OVER.

True I am just a shrimp, but I have faithfully done my part. I already have a gun, and works just fine too. I hope I never have to use it.

And in truth I hope to never have to use my other metals, and would rather pass them on to a daughter who will face an even stranger world, I suspect, than this one.

I do not know which sector of physical gold "movers" will incubate this new age of honest money, but I would not underestimate the 99%

If they act unintentionally in concert, as the 1% act in concert intentionally, the combined effect will be wondrous!!

Getting sovereigns in India requires paying a lot of premium. The premium is because there is no demand for them, and they need to import specifically. I paid about 10% extra for the CombiBars, and the jeweler got it imported for me :-). But it was still the best option for me. Even 10gm polished gold bars have a slight premium. The cheapest per gram are unfinished bullion 100gm bars.

Me too. My plan is focused on the potentiality that I might pass on my (smallish) hoard to my children if this pony ride continues beyond my allotment of heartbeats.

As for guns, I don't own one yet, but my wife and I agree that, if for no reason other than to exercise our second amendment rights, we need to become owners, and we are making that a reality...and really soon. It is an interesting time we live in.

Old habits, even those one would like to abandon altogether, die hard. So, yes, I do peruse Ure's blog from time to time. As for his devaluation musings, I'm not sure what to say, as the ideas expressed were, to my mind, somewhat rambling and diffuse.

It would seem George has heard from at leasttwo folks, that would be you and me, with a plethora of ideas consistent with freegold. But Ure's a staunch deflationist who, despite his pretensions to bold thinking, can't begin to discard the mountains of hoary old baggage that informs his very poor understanding of "gold". In short, if he's heard of freegold, he not only doesn't understand it, but is, seemingly, allergic to it.

There's a certain irony in this since George's colleague, Clif - yes, he spells it with only one f- High, of Web Bot fame, came out with a $75,000 gold price (and $600 an ounce silver) in one of his reports some years back. George has never connected the dots.

For whoever might be interested, FOREX Trader liked the post and commented that "some of the quotes you posted and the order in which you showed them coupled with the WGC quotes, show me just how deep ANOTHER's understanding of gold market microstructure really was."

He also shared something he learned from his network of "bigdog" FOREX traders:

"I am just hearing some word today that the December 2012 decline in gold (up to Dec 20) was caused by the unwinding of XAUEUR spot long positions by a very large hedge fund, the name I am hearing is Paulson, but I have no way to verify it."

Paulson would be part of the swing support contingent I mentioned, and that timeframe coincides with statements from my own personal bellwether, FWIW.

Just wanted to comment on two more of your paragraphs, since my general comment only addressed the linkage between Giants and govts.

"Basically as a gold shrimp you’ll be forced to either sit on the gold (i.e. have a boating accident and/or a very poor memory) or break the law in an attempt to smuggle/launder it into the 50K/oz capital gains free system of the giants somehow."

Gold is held in many forms and in many places. Will they confiscate bracelets in India? Bracelets from Indians in the UK? Wedding rings? 6 oz necklaces worn by burly builders? Sovereign rings? Individual 1830 sovereigns? 1840? Where will they draw the line?

My answer: they will do what is easiest and they will not have either absolute power or absolute motivation. So in my opinion if you have 1kg bars registered with a pension provider / 401 K and held by a bank, you are fair game. Anything in a bank safe deposit box, maybe. But they won't come knocking for your jewellery or antique coins. And a single heavy builder's chain of 6 oz could buy a house (OK, only if it was 24 carat, but are they really going to take them off you and assay them?).

"While the same giant crack down could also happen to silver, the low above ground stock to industrial flow ratio and its criticality for electronics may force the giants to allow it to freely flow for us poor shrimps while gold is locked tight for the same."

I tend to agree with you; but do want to point out that the opposite argument has been made here - silver hoarding will be discouraged due to its industrial applications and economic importance. The price dynamics are important too - silver prices in gold terms languished when gold was outlawed in the US and then spiked under the Hunts when gold holding was permitted. This was due to the time lag - the Hunts had invested in silver because gold was outlawed, but long after gold hoarding was legal, they still held silver and were forced out of the market and eventually into bankruptcy.

I think your main point is that risks exist and diversification may help; obviously I agree. I would suggest however that just as the exact sequence of events resulting in FG cannot be predicted, neither can the exact sequence of events resulting in general deregulation and revaluation of other physical assets.

India is a poor country. Being poor we don't really get into the value due to rarity too much. That is probably best left for the rich. When I go to sell the sovereign I will get the same value as I get from the gold bars, the amount of gold they have.

What is the point in wasting precious money. If it was a rare coin it makes sense to a very rich guy, but sovereigns are not that rare anyway. Why would I pay the premium.

I paid the premium for combibar, because I wanted the one gram denomination with the much higher convenience of the combibar. Other small coins are a storage hassle. Too many of them to easily count them.

I decided to have a bit of fun with "Dave from Denver" who has, in my estimation, long since been revealed to be sorely lacking basic knowledge where the gold market is concerned. However, despite often being wrong, Dave is seldom, if ever, in doubt.

As one might imagine, Dave is trumpeting the"the gold isn't there" meme with respect to the recent BuBa announcement. I decided to post, in my own words, Victor's response to me when I raised the scenario of gold not being made available on demand to sovereigns. I think FOFOA addressed a similar concern-it didn't involve sovereigns, but, rather, private parties, if memory serves-with me quite a while ago, but VTC's exchange is both more recent and germane, no pun intended.

Victor's answer was that, if, for example, Treasury did not meet such a request, that, Germany, in this case, would threaten to go into the open market to source their physical which would, to put it mildly, upset the global financial apple cart. That would be enough for Timmy to make the delivery in full in a timely manner.

Surprise, surprise, Dave did not post this riposte to the "The German gold is not there" meme he, and Alisdair MacLeod are promoting.

I pointed out, as part of my comment, that if the U.S. denies delivery they have no one to blame for all of the profoundly nasty effects that would occur when Germany went into the open market to source, oh, say 1,000 tons of gold. The question here, or so it seems to me, is why wouldn't Germany, at this time, go into the open market to make up the shortfall since it would be the U.S. not Germany that would ultimately be responsible for ending the present $IMF system with all the attendant turmoil?

The Union government on Monday hiked the import duty on gold and platinum to 6 per cent from 4 per cent with immediate effect — a move aimed at curbing imports of the precious metals to check the widening current account deficit.

“Government has decided to increase import duty on gold and platinum from 4 per cent to 6 per cent with immediate effect,” Department of Economic Affairs Secretary Arvind Mayaram told reporters.

He further said the government will link Gold Exchange Traded Fund (ETF) with gold deposit scheme, which will enable mutual funds to unlock their physical gold and invest in gold-linked schemes offered by banks.

“The changes proposed to the Gold deposit scheme will make it attractive for individuals to deposit their idle gold with the banks under the Gold deposit scheme,” Mr. Mayaram said.

He said the changes would help moderate import of gold and help in bridging the current account deficit (CAD).

Gold imports in 2011-12 amounted to $ 56.5 billion and in the current financial year, till December, they are estimated at $ 38 billion.

The Union government on Monday hiked the import duty on gold and platinum to 6 per cent from 4 per cent with immediate effect — a move aimed at curbing imports of the precious metals to check the widening current account deficit.

“Government has decided to increase import duty on gold and platinum from 4 per cent to 6 per cent with immediate effect,” Department of Economic Affairs Secretary Arvind Mayaram told reporters.

He further said the government will link Gold Exchange Traded Fund (ETF) with gold deposit scheme, which will enable mutual funds to unlock their physical gold and invest in gold-linked schemes offered by banks.

“The changes proposed to the Gold deposit scheme will make it attractive for individuals to deposit their idle gold with the banks under the Gold deposit scheme,” Mr. Mayaram said.

He said the changes would help moderate import of gold and help in bridging the current account deficit (CAD).

Gold imports in 2011-12 amounted to $ 56.5 billion and in the current financial year, till December, they are estimated at $ 38 billion.

Well, if you see this(the $IMF) as the ultimate Ponzi scheme it is...picture yourself in a sudden "Madoff Moment"....you are a large "feeder fund" (Germany)...you've seen signs and heard rumblings that your Madoff investment may be a fraud. You quietly call one day to redeem your investment. Mr Madoff replies, fine but for various reasons it must be paid out gradually over seven years. Now you know it is a fraud, but it's too late, you're investment is likely already lost. Shouting and screaming aloud only brings the demise to a head. Giving Mr Madoff some time allows for the possibility you get something back at someone else's expense. What to do??

I've had a little pet theory about the periodic attempts to cutback on the physical gold imports of India; some might callit "conspitetard" , but hey, I can live with that. It's based on acomplete lack of evidence. It's quite simple;

India has, between it's CB and, more importantly PRIVATELY held gold, an estimated 19,000 tons. They are still the world'slargest (publicly acknowledged) physical importer of gold. A number of Nations are severely UNDER allocated, whether viatheir CB's or their private sectors, to gold, and the "transition"would be smoother if they could build up their gold holdings. So, perhaps the BIS?? might have said, to the Reserve Bank ofIndia, "Hey, do something to give the other guys a chance, you've got enough, already." One way would be to try to getmore Indians into paper gold, or other paper investments.They've tried that, but it's not so easy; taxation is the other route, which they tried before, and met resistance. Will itwork this time? Who knows?

I may be all wet, but my theory at least has the benefit ofsimplicity.

Re your theory on India, postulated below as one measure that would have a positive net impact on physical gold availability. The rationale on the Indian side appears to be to improve balance-of-payments, which may be also the basis on which international pressure is being applied. The rhetoric in the Indian media on this subject is relatively transparent on an international comparison. They will need to tighten this up, otherwise people there may realise that the aim is (as stated!) a net outward gold flow from India and thus reduced physical gold in India to back domestic investors' holdings.

"2.3.1. Creating financialized markets

Since the volumes of gold traded in the physical market are so much smaller than in financial markets, a relative shift from physical to financialized markets in the developing world, especially in larger developing countries such as India and China, will in fact reduce the pressure on key physical markets elsewhere in the world."

If one finds ones self in the unfortunate position of being the victim of a con, one never, ever gives the con artist a chance to "make good" on that which they have already stolen, because that is part of the con. What's more, I daresay, in this case, a substantial enough reval would more than make up for the loss on the purloined bullion.

To your conspiritard theory, I'll add this even less fact-based and more conspiratorial concept, and offer it up for ridicule:

Why would the Reserve bank of India go along with this, thereby diminishing (slightly) their allocation of physical gold? Could it be in exchange for a slightly faster loosening of the binds that are holding Freegold revaluation in check?

RBI knows (from firsthand prior experience) that by restricting gold imports they risk serious, unwanted side effects. Illegal gold imports increase to fill the gap and an immediate side effect is a black market for USD at an exchange rate that (based on gold demand) values the rupee at 5-15% below the official RBI maintained exchange rate (i.e. USD sellers get more rupees per USD in the black market). This results in more and more USD sales leaking to the black market channel and the RBI slowly loses control of the key rupee/USD exchange rate. The RBI's primary objective in liberalizing gold imports in the 90's was to get back in control of the forex market and the initiative is well recognised as a key policy success.

"First, there are important factors that contributed to the comfortable accretion to reserves in the last five years but often go unnoticed in any review of external sector policies in India. (a) The liberalization of imports of gold has brought a large segment of unofficial imports and forex market into the official sector and reduced large transaction costs incurred in foreign exchange. In fact, meaningful development of forex markets was enabled by this measure and consequentlyeffectiveness of intervention in forex markets enhanced."

IMO RBI's current motivation (as wrong headed as it maybe) is solely to get the CAD under control.

thanks for your comments on leasing. If we believe the WGC statistics about the "users" of leased gold, then in 1999, of the perhaps 6000 tonnes on lease, about a third, or 2000 tonnes, went to gold users - the rest to forward sales by mines and carry traders.

Forward sales by mines and carry trade are out of fashion, and so what's left is the 2000 tonnes for "users". If this volume is still 2000 tonnes, I have two remarks:

1) Its value is about $100bn today compared to some $55bn of the 1999 volume of 6000 tonnes at $300/oz. So the dollar volume of the leasing market would have increase two-fold.

2) If in 1999, the vast majority of the 6000 tonnes was supplied by CBs, then who supplies the 2000 tonnes today (Euro system CBs have closed almost all open leases by now). There is room for OPEC, isn't it?

Re Paulson,

he is the poor chap who has made a fool of himself by denominating one of the large funds in ounces. Then he messed up some of his other investments (US financial institutions), and now his clients withdraw funds and he has to liquidate.

He is an example of what is not a giant. He invests other people's money, and precisely this is his Achilles heel. If they get nervous, he is forced to do the wrong thing.

If I was going to give any advice to a first time gun owner it would of course be go to the range but depending on where you live this can be difficult, however, under no circumstances are you to purchase a firearm and keep it in your home for protection without practicing with it at least once first. With that said I do highly recommend a Glock 19 and a Dac Technologies Sport Safe. Place beside bed and relax. The reason for the Glock is you will need more bullets than a revolver can hold and it is the firearm of choice for Law Enforcement. I chose the Dac Sport Safe because the last thing I want is an insecure weapon and then the next to last thing I want is a weapon I can't get to when I need it. Trust me, when you wake up at night you will be unable to spin a dial on a safe and direct finger print is easily busted by a ten year old. This safe works and as a guitarist and pianist it feels like I'm playing a small five note song. You can program the keys any way you like. This is the safe you want holding your weapon when you need it.

On another note, Motley Fool, if you have any advice for me on how to answer the questions I am having difficulty answering on 'the other site' I would greatly appreciate it. Obviously I am confused as to the 'current' relationship between Euro banks and the ECB. Thanks in advance.

Thanks for another great post. This one will require numerous rereads (at least for me!), and this is not a complaint, but does anyone else get Tired Head reading about Gold leasing/swaps/forwards/GOFO/sales/puts/calls/options/contango/backwardation etc. ?

I know it is important, but as someone who has ZERO experience in the gold markets, trading, Central Banking, etc. Man this gives me a headache!

Anyhoo, I did have one question (from the comments) that I am struggling with. And it goes back to Blondie's distinction between price and value. And anyone, please jump in and set me straight.

Jeff quoted you,

"Dollars bidding on MSFT stock set the value of that stock..."

Wouldn’t the dollars set the price of MSFT stock? Isn’t the value defined by what the company produces and your (an investor) opinion of same? As more people value it, then the price will rise, but the value remains the same? The value of MSFT changes because of the companies actions. The stock price changes because of investors actions based on their perceptions of the companies prospects.

"The United States is running an explicit reflationary policy of holding nominal interest rates below nominal GDP. Though this relationship was slightly more stretched back in the late 1970s, it is again near record levels. We are also dealing with far more liquidity injections by the U.S. government than in the past. In the U.S. alone, monetary and fiscal stimulus as a percentage of GDP has breached the 40% threshold, nearly 5 times what was put into the system after the great depression (Exhibit 52). Moreover, the latest round of quantitative easing is tied to unemployment, which we do not see changing quickly, given that new business formation is still running 35% below the historical average."

Um, Milamber, with regard to your first paragraph, Welcometo the club! Thank goodness, as some singer put it manyyears ago, "You don't need a degree in meteorology to knowthe direction of the wind", (or words to that effect). Since youHAVE taken the required actions, the rest is just an intellectualpuzzle to work on. It's fun, because when you figure out some-thing difficult, you feel good. I have thoughts on part 2, but I'll leave that to our "sharpest knives in the cutlery drawer".

re: PaulsonThere was mention of Paulson having to liquidate gold in December as an explanation for the drop. The problem many had was that the prices dropped in a pattern similar to typical 8AM plunges typical for what many believe are PPT sales.What I saw were a couple of days where the selling looked like a normal down market but marked by several other days on which a butt load was sold all at once. Paulson would not do this if he was trying to minimize losses. Possibly both entities were selling or the PPT was piggybacking but in the end it seemed to me to be inexplicable dumping for maximal price depression was the dominant force.

Those COMEX price dumps sure are a mystery, aren't they? It's as if a bunch of sell orders hit the market all at the same time, but why would anyone sell like that if they were motivated by profit? They wouldn't. So what are the other options? PPT is one option, because, assuming they want the POG lower, they are not selling for profit but for a purpose. But even that doesn't make much sense to me because it's too obvious. Couldn't the PPT bring it down more gradually if that was their goal and not be so damned obvious about it?

So what other options? Perhaps it's someone who's selling on behalf of someone else who placed the order after hours or over the weekend. In other words, it's someone trading OPM (other people's money), so what do they care if the sale is poorly executed? I had a broker that did that to me a few times. Or maybe it's several competing banks that need to dump a long position hedge because one of their big clients was forced to dump his long position hedge for which they were the counterpart.

If it's several competing banks (or entities) wanting to unwind a long position because of a single event like a Paulson puke, that could explain the fast dump, because the first one out the door gets the most dollars and then it goes down from there. So everyone tries to get out the door first and everyone ends up squeezing out together.

As Victor said, Paulson "is the poor chap who has made a fool of himself by denominating one of the large funds in ounces." So his investors in this fund were essentially long gold, and the fund itself was short gold (to its investors). Paulson had to hedge this short gold position by going long gold somewhere else to balance the risk of changes in the price of gold versus the assets in the fund. What is interesting is that he may have done so using XAUEUR via the foreign exchange market which, I think, supports my theory about the volume in the LBMA liquidity survey.

Since he's a sizeable fund, this XAU position may have left some FOREX market makers exposed to a short gold position which they then had to hedge. Those market makers could have been bullion banks and some of their hedge could have been long gold futures on the COMEX. So it's really just a series of knock-on effects. The Paulson investors pull out and that forces Paulson to sell his XAUEUR hedge which then forces the BBs to sell their COMEX long hedge. And you'd want to sell as quickly as possible especially when it's a whale like Paulson pulling out because you're likely in a race for the most dollars against others who will be doing the same thing for the same reason.

Does that make any more sense than a PPT plot to take down gold at a specific time? It's not like gold was making a moon shot at that time that needed to be halted. It's been pretty weak since October, and it wouldn't have been Paulson who was selling on Comex. Paulson investors were the dog's brain, Paulson was the bark, the BBs were the body and Comex was the tail that wagged.

Fofoayou are making me go all cross eyed.... I like the simple conspiratorial explanation....doesn't have to be right ....just easy...Actually that pattern of the 8AM dump has occurred several time when there was no Paulson to blame. Do you really think that market 'influence' only occurs rarely? Do you believe that the price of gold (as per Summers) is important enough to be manipulated?

No, I don't buy the conspiratorial PPT/Summers/Gibson's manipulation explanation anymore. I think it more likely has something to do with hedging activities coming out of London which has already been open 5 hours by the time Comex opens.

I somehow think that it will not be the US that will crash, directly. It will be UK or Japan that crashes first. So if Japan picks up the ball and runs with it, it is likely to trip first :-).

I had a analogy for the currencies. They act like the King and nobles of an empire. Once you get into an internal war. Some nobles that are faithful die, and then the King gets beheaded. The rebel nobles take its place. A few of the neutrals die, but most survive.

The USD is the King, JPY and GBP are the faithfuls. Rebels are Euro, CNY, and RUB. The others are neutrals. GBP or JPY would be the first to die and the rest will follow.

I think that UK will definitely trip, but the Brits are a stoic bunch (bunch of pussies) and will grimly put up with misery for a very long time, so things can get very bad here before anything goes seriously wrong.

The Japs also endure.

The big non-oil producers all need more gold, so they won't rock the boat - why would they?

The only wild card for me is the Middle East, but then that has been the case for many decades.

I see no change in availability of physical in size - if anything, it seems more available - more CBs purchasing than before.

A new large buyer of US debt is emerging.

There is no sign of significant inflation appearing.

Sure, CBs are trying to get inflation, but it hasn't started happening. Look at the Weimar inflation, it took a long time before people realised what was happening and for the shit to hit the fan.

Jevons showed us that debasement of the reserves DOES (chanelling ART, keep the flame alive!) lead to inflation, but it takes time. The inflation is the spark that creates HI, but not in a linear fashion - the two are in no way the same.

Banking shocks are unlikely as the CBs now have good experience with managing this.

If it is the ECB that is supporting the "gold" market and it does remove this support, there are plenty of others that can step in - others that want to see cheap physical stay available for a long time.

Lets compare with Weinmar HyperInflation. There are three interesting points in time.

1) The majority of printing happened from 1914-1919, to fund the war.2) The war repatriation from 1920 started another bout of printing.3) The HI started in mid 1922.

Difference to be noted. There was nobody dampening their money printing.

For US, UK, and Japan, there are foreigners that are consuming those debts. These countries have already caused enough printing, to match with the initial phase matching 1914-1919.

Now we are entering the phase of extended printing for filling up the hunger for real stuff. Now both, UK and Japan are thinking of getting rid of restrictions to printing. When that happens we would enter the phase of 1920-1922 mid.

Yes we haven't started the penultimate printing stage. But now you must understand the world in 1920s was not a disconnected islands world. It is a global economy with communication happening at the speed of light.

The high speed communication will make the plunge into HI very fast and I think sooner than what it would have taken in 1922.

I don't think gold is a real big problem. The price will be managed, to keep the buying below the availability, and the production to stay above a level.

This management might require gold prices to rise very fast, if the production costs start to go up very fast. But they will not let the price to rise too fast, as it would in turn cause the price to rise very fast in a vicious cycle, and cause the collapse at the top.

I do think the three CBs that have the most to lose will manage it. They just need to buy paper, and they don't need to sell any gold to achieve the controlled higher price.

I think the real trouble lies in the deficits. There is a currency war going on between several currencies, to try to reign in deficits by currency devaluation. This cannot go for a long time, as the consumption in the world is more than production. And the production is reducing because of the weak economy. But the consumption is not reducing because govts are the major consumers. We are entering into a global vicious cycle, which will go up very fast.

I empathize (and agree) with those who find the analysis of official gold (real and paper)movement, strategy, motive and counter-motive far too complex to "unpeel". There is always that extra "gotcha" layer, hidden and missed.

But I think this is of less consequence than it may seem, as long as one subscribes to the view that essentially all the "players" of this complex gold game are powerless in the end run.

And I think we can expect that it will be a thought gone virl among the 99% that will trigger the end run, more than a coordinated power play of the 1% (though that is not to say that the 1% have not made a decades long effort to be more coordinated, despite some few discordant self-interests).

And so to quote Paul Tustain at Balmarley (an astute fellow trail hiker it seems):

A previously successful credit based system will eventually collapse under the weight of its historical circumstances and the excesses of credit which it is sucked into at the time of its greatest success.

As the process of collapse unfolds one monetary store after another demolishes savers. If they hold notional long term obligations like pensions the underwriters fail. If they hold institutional debt the issuers fail. If they hold bank notes (and) the banks fail. It takes very few failures before the population starts to see risk in every credit based construct. Their faith in their institutions evaporates, and they become acutely aware of the dangers of anything intangible, and anything whose supply can relatively easily be expanded. This is when they begin to think obsessively about things whose supply is subject to some fundamental limit.

It becomes possible to understand why gold re-materialises as the only good money in times of such great economic distress. During such a period the most valued asset is the one which is incorruptible, and because the scarcity of gold is almost uniquely beyond the power of men to change (and because it can be discreetly owned) it is gold which re-appears as the agent of wealth storage and transfer at the junctions between the much longer episodes of representative money.

Well stated, we see the use of the word "savers" in FOFOA context. But what institutions are allowed to fail in this day and age?

Let's see: Enron, LTCM, MF Global, Sentinel. Carefully selected and managed failures which do not imapact the masses at large (though as Ann Barnhardt has shown, not without individual expressions of rage).

So I think Paul is correct to see "the population" as an important determining factor. But the extent to which CONfidence is preserved with endless bailouts (a double edged sword used only to broadside the public with an occasional slap) cannot be underestimated.(cont.)

(continued)Here in the U.S. the population will no doubt live and die by the dollar until its local (national) purchasing power fails, and then this of course brings us back to why we look at the complexities of global markets, because these pressures will indeed impact the dollar's viability among US wages earners and consumers.

Conclusion: What we experienced the last 70 years minus the last 13 or so, that is OVER. What we exprienced the last 13 years ... could that go on for another 13 ?? If the Tustain explanation of events is the only way forward, then yes, the planners will always carefully orchestrate CONfidence in the propping up of systemic failure, and yet this can obly be done through monetization and fiat expansion, so it is the exponential expansion of fiat itself that creates the virus of doom.

Simple people do understand the basics of "money printing" and they do fear for the collapse of the reserve currency on this account, both in the US and abroad.

As for the obvious price suppression of gold, it may be obvious to us, but we may represent 10% of the population, and at this point they could care less. It is what the 90% find "obvious" that is of concern.

The only thing they find obvious now is that the system still works, despite it's cancerous rot, and most people even today are "all in" with it. They might even swallow the patriotic horsehit to convert their 401Ks to T-bill annuities if Madion Avenue is hired to glamorize it, as they have attempted in Japan.

Personally, we should all hope for some rebel with facebook flash revolution to come out oif the woodwork if we want to see some real change.

Otherwise, hold onto your ankles for a long slow slog through the Keynesian cruise on the good ship CONfidence, but keep enough powder dry for that wildcard. No one can predict what no one ever predicts.

According to ZH, they will buy 13T yen of additional bonds each month starting in January 2014. One of the linked documents in the ZH piece says:

In addition to purchases under the program, the bank regularly purchases JGBs at the rate of 21.6 trillion yen per year.

(I read that to mean another 1.8 T yen monthly, for a total of 14.8 T yen in monthly monetization. There is a chance that I am misreading, however, and the 1.8T yen is already included in the 13T listed.)

If the information at this link is correct,

http://www.tradingeconomics.com/japan/government-spending

Then the government of the Japan spends 101.7 T yen per quarter.

Peter Bernholz' 'hyperinflationary line in the sand' is when a government monetizes more than 40% of its expenditures. Thus:

101.7T, divided by three, times 40% = 13.5 T yen monthly.

So the 14.8 T monthly in monetization by the Japan would have a high likelihood of pushing the country into hyperinflation.

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